Below is my situation. Simplified numbers for ease
1. I purchased a $1m property with $800k debt.
2. Value has gone up over the years and I have refinanced the debt to $1m (200k top-up)
3. All the refinance proceeds have been deposited into my offset account as have all my savings. I currently have $800k sitting in my offset account. I have never used the redraw function. That is – $800k in offset account and credit limit sits at $1m
4. I have rented this property but plan to move back into it as my Principal place of residence soon.
Question is this:
If I pay the $800k sitting in my offset into my redraw facility and redraw and use these funds to buy a new property, will I be able to deduct the interest against the rental income for the new property? From the below ATO guidance it would appear so.
Following on from this, as this property will then be effectively unencumbered, if I subsequently refinance it at say 80% LVR at a later point – will that $640k debt be tax deductible if I use it to buy another investment?
I may move out of my principal place of residence and set it as an investment property so want to ensure the initial $800k and subsequent $640k can be deductible.
This topic was modified 4 years, 3 months ago by propertyboy.
If you pay the loan down by $800k it will be mixing it furhter so you should split it. Pay $800k into a $800k split and redraw it and invest it. If the investment is expected to produce income, such as rent, the interest on this split would generally be deductible.
Deductibility is determined by the use of the money borrowed, not the security. So if you borrow another $640k and invest it the income will be deductible. THe main criterisa is that it needs to generate income.
Hi Terry, what do you mean by my loan being mixed?
If I move back into the property as my principle place of residence and put $800k into a redraw and redraw to buy another property will the interest be deductible against the rent of the new property? I am redrawing (borrowing) to invest in the second property.
Part of this relates to the purchase of the current property and part relates to not much, you borrowed and put in an offset mixing with cash.
If you put $800k into a $1mil loan the balance will be $200k, but this balance partially relates to the purchase of the property and partially to the mixing in an offset account.
It will be mixed furhter if you pull $800k out to invest. You could only claim part of the interest.
But if you split the loan and paid $800k into an $800k split and redrew to invest the interest could be deductible in full, if you do it right, as there would be no mixing then. 100% of it was used for the 1 investment.
It is not really relevant if you move back in or not.
Actually you are probably best to work out hte portions of the mixed loan now, then split, and then do the above as this might help you claim the interest on the $200k if you were to rent the current property out.
So if I move back into the property and it becomes my principle place of residence and put 800k into the redraw then redraw to buy a new property for $1m (80% LVR). Are you saying none of the interest is deductible against the rent of the new property? The ATO tax guidance appears to outline it will be. How much will be tax deductible?
This reply was modified 4 years, 3 months ago by propertyboy.
So if I move back into the property and it becomes my principle place of residence and put 800k into the redraw then redraw to buy a new property for $1m (80% LVR). Are you saying none of the interest is deductible against the rent of the new property? The ATO tax guidance appears to outline it will be. How much will be tax deductible?
Not sure how you get that idea from my posts. If you split the loan and do it properly 100% of the interest could be deductible if the borrowed money is used to buy an income producing property as per s8-1 itaa97
I am a tax lawyer with a credit licence. with lots of experience in this area. You will need to apportion the interest if you do not split, furthermore, you will be paying back deductible debt with every deposit into the loan.
Splitting a loan means making one loan into 2 (or more).
This reply was modified 4 years, 3 months ago by Benny. Reason: Editing as per Terry's correction - for clarity
What I have seen happen with CBA is that someone might put in some money into the loan today and then think they can redraw it immediately or the next day, but they have to wait for the next monthly payment to come out first. I don’t have any CBA loans atm, so have not experienced this, others have not had any issues.
So after you split the loan I would ask them if I paid say $200,000 into the loan today, could I redraw $200,000 tomorrow?