Converting a principle home to an investment home

[Mum2SweetCs]

Hi All,

We want to convert our principle home to an investment home and get a bigger house. There is not much debt left on our current home loan but we want to be able to negative gear it when it becomes an investment.

Are we able to borrow a investment loan say for $400,000 for our current home or we can only redraw up to the amount of our initial loan and then turn it into an investment loan?

I hope i havent confused anyone LOL

Any advice would be great!

THanks!

[Muppity]

Hi

sorry - I can't answer your exact question as it always confuses me. But, one thing that I can absolutely recommend is thatyou pay a couple of hundred dollars and get a proper valuation on the house (or pay for a copy if the bank gets one done). It may seem crazy now but when you go to sell it years from now and are trying to prove the value at the time you changed purposes as far as capital gains tax go, it is worth every cent.

I think I spent a small fortune and countless days trying to get a retrospective valuation once - and I wouldn't wish it upon anyone.

[Astrid]

I really recommend with this type of situation to see an accountant, as they should be able to assess for you the best way to go, plus work out if tax wise it is going to be beneficial to you. Often whilst negative gearing works for tax, it does not for other areas like HECS and FBT, often when calculating those net rental losses have to be added back in.

[Mum2SweetCs]

Thanks ladies

Yeh this area confuses the hell out of me!!

A valuation sounds like a good idea.

We emailed our accountant so ill see what he says

Do we see a financial adviser, financial planner or an accountant for situations like this?

i always get confused between the 3!

[Lulu]

I would talk to your accountant more often for these types of questions, it does get confusing xoxo

[misty]

Unfortunately, the ATO applies an 'intention' or 'purpose' test to determine deductable debt. So if the loan on your current residence is say $x, when you turn it into an investment property, only the interest from the original loan of $x is deductible. Any increase or extra mortgages you take out against this house are also subject to this intention test. Meaning, If you take out a new motgage of $400k against your current residence, the purpose being to pay off your 'new' residence, the interest is NOT deductible - even though it is secured by the Investment property. If you used this $400k to go towards another investment property, then it would be deductible.

So basically it depends on what your intention or purpose is for the funds you are borrowing - if they are to go towards an investment (property, shares, etc) the interest is deductible, if they are to go towards personal use (PPOR, car, hoilday, etc) then the interest is not deductible.

By all means talk to an accountant, however before you do ensure that the accountant specialises or deals regularly with property investment - many don't and thus often make mistakes in relation to these issues. Deductible debt and expenses in relation to property is one of the biggest areas targeted by the ATO due the the HUGE number of mistakes made by people.

If you need more information on this, pm me - I can direct you to a website that will provide a wealth of information about property investment. Otherwise check out the ATO website, they have alot of 'senarios' to help explain the various rules.

[*star*]

We looked into doing this kind of thing when we wanted to upsize our house. Due to the tax issues, it worked out that it would be more beneficial for us to buy a new investment property than use ours as a rental. I think due to the reason misty mentioned above (but I too find this confusing). Worth checking it all out now!

[PinkPalace]

I would see an accountant.
It really isnt too hard. you dont have to do anything for your loan.

We have done it a few times (just because we move so much) and our house turns from investment to principle on and off.
It is just a matter of letting your accountant know and they will be able to calculate $$ in regards to your loan.

I know we did turn our loan to interest only though