Buy cheap so you can sell cheap?

[tricky]

I'm mentally wrestling with an accounting/tax situation that could do with some experienced input to clear my foggy thinking.
Trying to keep it simple:
A long time ago I used to change my car often. I'd buy a newish one (at a good price) and sell my current one and the important thing was the difference in price between the two cars.
I didn't worry to much about 'market value' of either car - I just focussed on the difference in price that I'd have to cough up.

Moving on to property:
I'm thinking of replacing an existing property with a better performing property. If I can buy the new property real cheap, can I sell the existing property cheap and get a quick deal? Of course.
But will I lose some tax benefits? Is this situation quite different to replacing my car?

Here's some figures for example:
Usual situation:
Property A - worth $200k with 200k mortgage. Interest on 200k is deductible.
Sell property A for $200k. Pay back mortgage.
Buy Property B - worth $300k with 300k mortgage. Interest on 300k is deductible.

My hypothetical situation:
Property A - worth $200k with 200k mortgage. Interest on 200k is deductible.
Buy property B - worth $300k for $250k. Interest on 250k is deductible.
Sell property A for $150k (quick sale - I saved 50k on purchase of B so don't mind dropping 50k selling A)
Pay 150k from sale of A towards the mortgage on A leaving 50k outstanding - secured against ??? B?

So my outcome is owning B with 300k in mortgages but only 250k being deductible. So I'm worse off?

Or can a clever accountant dance around with the figures and end up with interest on 300k being deducible even though the purchase price was 250k?

As usual, appreciate all comments.

[SuperDad]

Hi Tricky,

The first trick would seem to be to find a lender who would allow $300K to be secured against a property purchased for $250K. Supposing you have a valuation for $300K, the trick would be to find a lender that will lend against valuation rather then purchase price, at the time of purchase.

If you can't do this immediately, then the trick will be to find a lender who is happy to lend against valuation after a certain period (say 3 or 6 months), or even sooner if the property has been renovated. (My mortgage broker tells me that a lick of paint inside will count as a reno or improvements.) Then, if you use the extra $50K for the purpose of investing in property, interest on the whole $300K will be deductible. It all depends what the extra $50K is used for.

This comment is only based on my knowledge of how to do things. Others out there may know a better way of getting interest on the whole $300K deductible from day one. If there is a way, I'll be as keen as you to know it.

Paul.

[cube]

The $300K in mortgages is made up of $50K from Property A + $250K from Property B.

Yes, the problem is securing the $50K, but if you can do that, then all the interest is still deductible - it is the intention at the time of taking out the loan that is important, not the presence or absence of any particular security.

cube

[Dean@Massiveaction]

Not enough info Tricky. What are the yields on the properties. Bearing in mind that ultimately the real money in property is in capital growth......
If you keep property A and it rents for $300 a week you have a cash loss in very rough numbers of lets say $100 a week = $5000 per year.
BUT if you keep that property and allow for rents increasing at 3% per annum and capital growth at 3% per anum then in 5 years
Sell property now be $5000 cashflow richer
Keep property
1. Mortgage at 8% = $80000 outgoings
2. Rent at 3% growth = $79637.03
3. Capital growth @ 3% = $231854
This is off the top of my head to get you thinking but in simple terms I make you to be $31491 better off if you keep this property. That is with no allowance for tax benefits or the fact that 3% capital growth is ridiculously low.
Sell this property when someone prises the keys out of your cold dead hands

[JohnL]

You probably need to do your figures over 8-9 years, to ensure you capture the need boom. The property may be worth less than it is now in 3-5 years time!!

John