I am about to purchase my first IP – very excited!
Bank says I have to pay a 10% deposit.
I don't have any savings as such for the 10% deposit, so I will be redrawing the 10% deposit from my PPOR loan (I have parked every spare cent into the PPOR loan and now have about enough cashback available for the 10% deposit on the IP loan).
I am just wondering if I will be able to claim back the interest charged on that 10% deposit (which I have redrawn from my PPOR loan) as a tax deduction? I'm thinking I can't…..
If I am not able to, is there a different way that I can structure my loan to ensure that the interest on 100% of the loan is tax deductible?
Thanks heaps in advance for any advice!
Lil,
If you redraw from you existing loan account then you will have a mixture of investment and personal borrowings mixed in together. Depending on your level of equity, another option is to take out a LOC credit secured on your PPOR to fund the 10%. This LOC can jbe used again to fund future IP's as equity increases. Depending on circumstances the LOC should be with your existing lender for the PPOR but you can use any other lender to fund the loan on the IP. Also consider setting up a offset account against your current loan on you PPOR – to reduce non deductable interest.
Regards
Thanks gibbo for your advice!
Wow, I didn't think you could do such thing ie. reborrow using line of credit against my PPOR and be able to claim back off my tax.
I just checked the website of my PPOR lender and they charge $600 establishment fee for a line of credit. I guess that fee is also another tax deduction?
I did think about the offset account option but unfortunately the loan I have on my PPOR is a basic variable one and doesn't offer 100% offset account.
Thanks again for your advice
Hi Lil,
The $600 establishment fee is deductible but over 5 full years, not all in one year.
It is possible for claim the interest on that 10% withdrawn from the main loan. But it is very messy and not the ideal way to do so. It will create future problems trying to work out the claimable portion because it is one big loan.
The ATO considers each subsequent repayment into that loan as coming off the main loan and IP loan in proportions to the original amount. confusing?
eg. $100,000 loan, balance is $90,000 and you take out $10,000 for an IP. 90% of the interest on this loan is non-deductible and 10% is deductible.
If you were to deposit $1000 in the future 90% of this would come off the main part and 10% off the IP part. if you were to make another deposit, then the same.
After 10 deposits it can get very messy.
Ideally you want the IP portion to stay at interest only and all the repayments to go to the main PPOR portion to repay non-deductible debt faster.
Therefore a separate split is much better.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Lil,
I would redraw the 10% deposit and split your loan (if your loan product allows splitting) into the 2 subaccounts. The 10% deposit as one sub-account and the remainder in another subaccount.
The interest expense from 10% subaccount will be all tax deductible while the interest expense from he other subaccount not tax-deductible.
In fact, if you have sufficient capacity, you should also redraw more for the stamp duty on the IP plus legal fees and other fees on the new loan. All those costs can be lumped into the 10% deposit subaccount and the interest expense on this subaccount will be all tax-deductible.
Agree, a split is the best way to do this. It apportions the use of the debt and your accountant will thank you for it.
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