Shaun&Dee

Right, here goes with my question...

Property A - I currently live in this property and there is no mortgage owed on it. I own it outright.

Property B - I purchased this place as an investment property with a mortgage. When I fill in my tax return the interest payments are able to be claimed as a tax deduction.

I want to but a new property C, for which I will live in, and then rent out property A as an investment property. If I get a mortgage (which I can) for property C I presume that I could not claim the interest payments as a tax deduction for property C as it would be my principle place of residence. Do I somehow need to transfer my equity from property A to property C so that Property C owes as little as possible, and Property A then has a mortgage of which the interest is dedeuctable.

Got it...??? So whats the best way to go about doing this?
Thanks, Shaun

floss in dubai

Unfortunately, you're not allowed to transfer equity. If you rent out property A you will be taxed on all rental income. The only way around it is to sell property A to help fund your new residence then buy another investment property.

ABCDiamond

To get any relief on mortgage payments for property A, you would need to sell it to another entity, ie a Trust or something, and then have a loan taken out to buy it from you.

Shaun&Dee

I dont want to sell property A though, surely there has to be a way? Do I have to sell it to myself?

floss in dubai

That would be tax avoidance and is frowned upon by the ATO.

ABCDiamond

If you were to set up a trust, you could then have your trust buy it from you, but you will pay out in annual accounting fees. Not sure how worthwhile the exercise would be, especially after stamp duty costs etc.

As far as I am aware there isn't a better way, and I have looked

ABCDiamond

Just another thought about property A, and capital gains tax.

This aspect should be looked into before doing anything, and the date you bought the property and it's current value, could cause a problem.

eg:
Purchase say 2005 for $300k
Value in 2010, say $400k ($100k increase during PPR time)
Transfer to IP in 2010
Value in 2015, assuming market stays level, $400k. No Increase during IP time.
Sell property for $400k
Tax man takes tax on half the profit,($50k) ie 5 years out of the full 10 ownership period, pro rata.

Scotty1

Can you not take out a mortgage on property A while it is still your main place of residence and then use the funds to buy property C. Then let out property A and claim mortgage interest relief?
To do this you would need to be able to get a mortgage on property A though and disclose that you wanted in to buy a second property.
Not sure of the tax implications however - just thinking from a mortgage perspective.
Scotty

Shaun&Dee

That seems feasible...may work. I will investigate.

ABCDiamond

The tax office take account of the 'reason' for the loan, in determining tax deductibility.

JAJ

Have you thought about whether you might prefer to live without a mortgage? You would have a lot more security that way - ie with one or two properties owned outright, as opposed to having three properties and mortgages.

If you don't have a mortgage payment, then it should not be too hard to save up for your next property.

ExSmoggie

This is correct. No matter where or how you move your equity, your pupose for borrowing is still to buy a property which will be your primary residence so I'm afraid the interest would not be deductible in any scenario.

Shaun&Dee

Yes I now have purchased a book on it and agree the interest would not be deductible. It all gets very complicated. The purpose of the loan would be to purchase a property for me to live in so wouldnt be deductable.

Kiwipaul

I see you could have 2 options.

1) Whilst your living in Property A take out a mortgage on property and buy Blue Chip shares. You might have to hold these for 12 months. Then after 12 months sell shares and use money to buy Property C. You now have property C mortgage free and a mortgage on Property A. The mortgage on Property A is now tax deductable as the purpose of the mortgage was to buy the shares. Not sure how legal this is.

2) Buy property C with mortgage and rent out property A. Now direct ALL the rental income from Property A & B into an offset account to pay off mortgage on Property C. You now take out another mortgage on property A to cover the interest payments on the this mortage and the current mortgage on property B. The mortgage on Property A would increase rapidly as you are using ALL of the rental income to pay off your mortgage on property C as fast as possible. The mortgage on property A would be tax deductable as you are using the property A to generate income. Their is nothing to say you have to use your property income to pay off the mortgage on the investment property first I'm pretty sure this IS legal.

Also make sure both mortgages on Property A & B are interest only to minimise your mortgage payments.