Question:
We have paid off most of our home loan and we want to upgrade to a new home but keep this one as an investment property.
Can we withdraw the equity in our current home and use it as a large deposit in our new home, with the added benefit of increasing the tax deductibility of the investment loan?
Answer:
No, the tax man doesn’t see it this way. You need a little foresight – well, a lot actually – to make this strategy work.
If you were to redraw some funds from your original home loan, it would be considered a new loan when it comes to tax. It’s the purpose of the redraw that determines whether the interest on that portion would be tax deductible.
In your case, using the funds as equity in a new owner-occupied home is not considered to be for investment purposes, and you could be in trouble with your taxes if you attempt this strategy.
But there is a way you can do this without being any worse off. You can get the advantages of paying down your original home loan and not get caught in this trap by having an offset account.
You could set up your home loan with a linked offset account and, over the years, rather than paying down your home loan with accelerated repayments you could instead build up savings in your offset account. Your interest bill would be the same.
The money in your offset account can provide you with a substantial deposit for your new home when you are ready to upgrade, and it allows you to maximise your interest deductibility.
You would simply withdraw the money from the offset account as all or part of your deposit on your new property and the interest on the full amount of your existing loan would be tax deductible.
Financially this could leave you in a much better position – but remember that you must act to set this up before you start paying down your original home loan.
And of course, speak to your accountant about your personal circumstances before making any decisions.
Moneylogue 