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Is there benefits in rebuilding a house on PPOR with Equity and renting out years later?

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Ervin | 28 Nov 2012, 10:08 PM Agree 0
I'm would like to rebuild on my current PPOR. The current house has major damp issues and finding another property in the same area is much more expensive. I do not want to sell this property. I am considering drawing back on the equity of this PPOR, rather than just applying for a new loan. I'm not sure if I'm on the right track or not, so I have the following questions.

1) Is there any benefit in drawing back on the equity rather than applying for another loan? Would this allow me to borrow more funds down the track for investment properties? Does the bank only worry about ability to repay / servicability?

2) Is there tax benefits in the long run, for extending a loan on my current PPOR now, with the possibility of renting it out a few years down the track? Can I claim full tax deductions on loan interest? or would this not be possible because the loans were taken to build a house on PPOR?

3) If it was rented out a couple of years later, how do you calculate the amount of tax deduction applicable on this and other loans against the same property (originally PPOR now turn investment)?
  • Eos Property | 14 Dec 2012, 12:30 PM Agree 0
    Not an accountant so take what I say with a grain of salt.

    Simply redrawing funds is not really an option given the agreement you have with the bank requires you inform them of any material changes you make to the property. Depending upon the nature of your rebuild this clause may come into play. The bank will probably want to do a new valuation to make sure their level of security is sufficient. Best to speak with your broker to get some guidance on this one.

    If you redraw for investment purposes you do have the potential to mix your investment and personal expenditures. This complicates things from a tax perspective. Much better off splitting off your investment loans so you can keep much better tax records. Depending upon the bank this most likely be a line of credit type facility.

    Any extensions you do to your loan will have to be directly attributable to your investment property. So, if you did move out then interest on the loan balance would be fully deductible.

    As a footnote if there is a possibility you may move out you are best placed using an offset account structure and placing all surplus cash into that account rather than paying down your PPOR loan. Far easier for tax purposes going forward.

    Keeping your loans split is the easiest way to track deductibility. Any other way creates a book keeping nightmare.
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