60% LVR reduces negative gearing

[artdeco]

hi All,

Is it considered true that the new LVR rules reduces negative gearing? For example, say

I have family home worth 500k (no mortgage)
I plan to borrow 700k to buy a new family home that cost $1million.
After buying my new $1 million family home, my 500k family home now used as a investment property (rental).

For new LVR (40% deposit), this means my 700k loan is split. 420k (60%) will be on the 500k home
and remaining (40%) 280k will be on the 1 million home. This is not so great as the interest on the 280k loan cannot be tax deductible. Under older rules, a larger amount of the loan can be on the investment property resulting in a greater portion of the loan being tax deductible.

Would be great if someone could advice if there is a way to achieve better tax deductible from the loan interest.

[Bobsyouruncle]

You can split the loan differently. Talk to your bank and your accountant. There is no reason you can't have 500K against the rental.

[Anthonyacat]

While Bob is correct, that's also irrelevant. There's a base misunderstanding here on tax deductibility.

It doesn't matter what the loan is secured on. If it's taken out for the purposes of buying the rental, it's deductible. Doesn't matter if it's secured on your home, on your car, or an unsecured personal loan. If used to buy the property, interest is deductible.

However, in your example above, NONE of the debt is deductible. Not one bit. Because all the debt was used to purchase the new family home. To get any deductibility at all, you'd need to restructure.

[Bobsyouruncle]

Yep thats why I told him to talk to his accountant. He is doing it wrong :-)

[brokerman]

While Bob is correct, that's also irrelevant. There's a base misunderstanding here on tax deductibility.

It doesn't matter what the loan is secured on. If it's taken out for the purposes of buying the rental, it's deductible. Doesn't matter if it's secured on your home, on your car, or an unsecured personal loan. If used to buy the property, interest is deductible.

However, in your example above, NONE of the debt is deductible. Not one bit. Because all the debt was used to purchase the new family home. To get any deductibility at all, you'd need to restructure.

This! Too many people get it wrong for the sake of one meeting with a professional.

[artdeco]

thx, no problem. i will set up a meeting with an accountant.

[Rosco]

Hi Artdeco,

First - Is your existing house a good rental? Or is it better to sell the existing house and buy something specifically as a rental.

Most people get emotional and keep their existing house, but personal houses are often not great rentals.

Things to think about
- Does it require large repairs? does it need painting long term?
- Is there an opportunity to add value? For example can you add a minor dwelling or subdivide
- Is there large gardens that a tenant won't look after
- What is the gross yield? What is the cashflow and return on the money you have invested in it?
- Is there lots of valuable chattels you can depreciate?
- Does this property help you achieve your long term aims and goals?

Rather than focusing on the tax deductions to start with, I would be looking at it like a new purchase. If you didn't own this property, would you now be buying it as a rental?

Ross

[Nick G]

Great advice.