Where do I go from here?

Hi everyone, just found this forum, love it!

We have outgrown our house and want to go bigger, and as hubby has been looking at investing options, we thought we would move out, turn our PPOR into an IP and start that way. However a friend told me last night that if we turn out PPOR into an IP we will be taxed fully on the rental income, regardless of whether it is used to pay the mortgage on the property or not. I decided to investigate further and found out this forum. It seems we have heaps more issues to address, I am just so confused at the moment, would really appreciate some direction. How silly of me to think it would be simple!

We have tapped into the equity of our house over the years for home improvement and personal use and now have only about $150,000 equity left in the house. If we rented the house out the rent would cover the repayments fully.

I am assuming my friend is only partly right by what I have read today, we will only get deductions for the interest on the original loan and have to pay full tax on the equity we have used for personal use. Then I read its best to get an IO loan for the house and put principle payments into an offset account.

We dont really want to sell at the moment but we do need to move into a bigger house. Would a rental or a purchase be our better option??

I am very confused and have no idea what the tax implications are or where to go from here

Any help would be much appreciated

Hi TC, welcome to InvestEd!

Unfortunately, if you were to turn your PPOR into an IP, you don't get to claim interest for any of the new borrowings you've made which were for private purposes.

It gets a bit complicated (ie best to see an accountant), but you'd basically need to work out how much of the original loan is still remaining after all the money you've moved in and out - you could only claim the interest on this portion.

It could well be that you have already effectively paid off the original loan and all the remaining borrowings are for other personal uses and thus there will be no interest claimable at all once it becomes an IP. This is unfortunately a common problem that people face in your situation - not a lot that can be done about it really.

You need to do the sums, but selling a property just because you don't get a tax benefit from it is rarely a good justification in my opinion. If the original property is still fundamentally a good investment and you can afford to buy a new PPOR even without the extra deductions, then avoid the costs and fees associated with selling and just hold onto it.

The numbers might come up with a different suggestion though - depends on your situation and the nature of the property and you cashflow situation etc.

Renting is always an option - our situation was like that - we bought a house to live in, paid off the loan and then got offered work interstate, so we moved out, rented it, and have been renting ever since. We bought additional IPs using money we borrowed against the first house (this new equity loan was fully deductible since it was for investment purposes). Depends on your goals and needs really.