Q: I built a four-bedroom house in 1998 and lived in the house for 19 years. My house was fully paid off in 2006. I bought a new piece of land and built a house on it in 2017 – the handover for this house was 30 November 2017.
The loan on this house is $750,000, and this loan is a residential investment loan. Can I move this loan to my paid-off house, and can I change my residential investment loan into a home loan?
My paid-off house is currently being rented out, and as there is no interest to deduct it against, I have to pay tax on the income.
Many thanks, Anurka
A: Thanks for your question, Anurka – it is one we get regularly. The short answer is no; you cannot just move debt that was used for your new PPOR (principal place of residence) to your old PPOR when you decide to rent it out.
However, there are limited circumstances in which you might be able to ‘sell’ part or all of the property to a family member in order to achieve your outcome. I have detailed below a scenario to explain this:
Property 1: Owned 100% by Jane Brown and valued at $1,000,000. It was purchased in July 2000, is fully paid off and has been Jane’s PPOR for the entire period of ownership. Jane met and married John Smith in January 2005.
Property 2: Purchased in December 2005 for $1,000,000, of which $900,000 was borrowed. Jane and John discuss keeping Property 1. John would really like to keep Property 1 as a long-term investment, while the couple plan to move into and occupy Property 2. John would also like to have his own interest in the property. He suggests purchasing 50% of Property 1 from Jane at market value, and borrowing to purchase his interest in the property. The debt as a result of the sale would be as follows:
Property 1: Debt with no sale: $0 Debt after sale: $500,000
Property 2: Debt with no sale: $900.000 Debt after sale: $400,000
It is extremely important to note that the main purpose of this arrangement cannot be to obtain a tax benefit, otherwise you risk getting into trouble with the Tax Office under Part IVA of the Income Tax Assessment Act (the anti-avoidance rule for income tax). You would therefore need specific advice for your circumstances.
There are two other important points to note:
• You need to keep capital gains tax (CGT) in mind. In the above scenario, there was no CGT, but you will need to seek advice to ensure that there will not be any CGT on the sale.
• In this example, stamp duty would be applicable in at least some states of Australia, so you would need to weigh up the cost of stamp duty versus the benefit.
"There are limited circumstances in which you might be able to ‘sell’ part or all of the property to a family member"
Need to know
- Debt cannot be transferred between different properties.
- In some circumstances, a property can be sold in parts to reallocate debt.
- You need to check whether CGT and stamp duty are applicable.
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