Forum Replies Created
total loan amount is ($583K) and current valuation (830K), LVR 70%…Not sure if i got the calculation right…..
Below is the balance
PPOR = 230K Outstanding = Valuation $410K –> 100K+ linked to offset
Resi Loan 1 (equity from PPOR) = 90K
Resi Loan 2 = 263K = Valuation 330K
Thanks
Hi ,
I am not expert at this, but can advise that I was in same boat. I've done
1) this point. I agree with TerryW that to make sure offset account linked to this IO has no other funds apart from the excess fund which will be used at settlement. I, still have this offset account open with some excess funds, which I am planning to put in redraw and close this offset account. I am with ANZ and they do not have any fees for redraw.
My accountant has confirmed this setup is fine, but the important thing is the excess money ( which I will put in redraw) should only be used for Investment purposes in future not for personal use.
Hope this helps
S0805
Hi Duckster,
thanks for your response. It wasn't my intention to get financial advise via this forum, but i can see how it could have sounded like I was seeking financial advise, my apologies for that.
Also, thanks for the links provided, hopefully that will guide me to understand what sort of insurance policies are out there.
thanks again, apologies for any confusion i've caused
S0805
Thanks Jamie.
Hi Jamie/PLC,
I am not 100% percent sure but will check with my broker if this loan has redraw facility or not. I’ve feeling that this was discussed with my broker during loan setup and I was somehow convinced not to go that path….anyway I’ll check that again.
Please correct me if I am wrong the way redraw work is like this e.g. Loan of 60K has 5K in redraw then bank will charge me interest on 55K.
Also, I think I’ve to be careful if I ever take the money out of redraw as it needs to be only used for investment purposes. (like for second IP)
If in future I need to fund my second IP, is it possible that I ask bank to release the available equity of this loan (which is equity of PPOR) and place it in redraw. Can that work?
Thanks guys
Terryw wrote:Sounds like you have borrowed money to invest in a non interest bearing savings account. DangerousHi Terry,
Thanks for your reply. I am not sure about what you meant.
My intentions to borrow this money is only or investment, but after the settlement I found that bank has lend me more money so rather than mixing this money (which intention is for investment only), I opened another offset account to make sure they don’t get mixed anywhere. Do you think it is still dangerous?
If yes, then what should one do in situation, coz anyone using the PPOR equity to fund deposit for IP will face this, as equity loan (IO) will always settle earlier than IP loan. Where should one park money until the IP loan gets settled? I understand this will not be problem if LOC is used but it will for Standard Resi Inv Loan.
Thanks
S0805
Thanks Jamie for your reply.
– currently there is no plan to convert PPOR to IP, in any case converting it to IO would be good idea if I suffer with serviceability
-i agree offset is not the best place to park the equity release…..Loan in question is IO only so can't put that into redraw until it becomes the P&I.
Just need to get your comment specifically on what should I do with with excess equity a) Park it into my PPOR offset and proportionate tax every year b) wait for 5 yrs IO to finish and park that money back into the loan (pay off the principal). This offset is costing me fees which I want to save…..
thanks
S0805
Terryw wrote:s0805 wrote:Hi Terry,
I had identical situation and had just settled on my first IP. I need your opinion to understand if I've done this right or not. Bank allowed me to borrow $90K as equity of my PPOR as separate loan, when I was settling on $90K loan I advised bank to open new offset account and link it to $90K and put all money into the newly created offset (which they did), same day I wrote a cheque for 10% deposit of IP and given to RE agency's trust account. Have I done the right thing here?
Later on, I used rest of the money from this newly created offset on final settlement. Even after the final settlement this account still has 8K. I do not want to keep newly created offset as it is costing me admin fee. I had chat to my Account and he advised that i can park this 8K in to Offset linked to PPOR and when it come TAX time, he can proportionate the 8K amount (which has not used for investment purposes). Do you think it is right thing to do? Is there any better way this situation can be handled
thanks
S0805
Strictly speaking what you have done has created a mess. Interest wouldn't be deductible because you borrowed money and placed in a savings account. However ato may not be so strict and may allow the dectiin if you can clearly trace the funds. Mixing borrowed money with not borrowed will result in even more mess. It will cause the original loan to be a mixed purpose loan and any subsequent repayments must come off each portion. Bit of a mess. But interest on $8k will be minimal.
Hi Terry,
Thanks for your reply. Just to be clear, I haven't yet mixed my 8K with my home loan offset.
You've said
Strictly speaking what you have done has created a mess. Interest wouldn't be deductible because you borrowed money and placed in a savings account. However ato may not be so strict and may allow the dectiin if you can clearly trace the funds.
I quite don't understand this, I understand that I borrowed money and place it savings account(offset), but this was brand new offset account created on the same day when 90K was drawn and only linked to this 90K loan, ,on the same day 32K was given to agent and it had 90K-32K sitting in it for 40 days. On 41st day I used the rest of the money from this offset for my final settlement and at the end of that till now it has 8K sitting in it offsetting my 90K initially drawn. These are the only transactions (both transaction for investment purposes) happened on these offset account. is this still incorrect method?
Mixing borrowed money with not borrowed will result in even more mess. It will cause the original loan to be a mixed purpose loan and any subsequent repayments must come off each portion.
I Agree on this 100%. The 8K left on my newly created offset account which is offsetting my 90K loan is my problem now, not really sure where to park this money (as i want to close my offset account) . My Accountant has suggested that we take this 8K and put in my Home Offset and in tax time we'll proportionate (deducting) interest on 8K before filing return. The only way i see out of this is to leave the offset with 8K open unless you think proportionating 8K interest every year should not be an issue from ATO point of view. I am going to use this 8K in future only & only for investment purposes if the need arises otherwise it will be sitting there for good.
Apologies if my questions are repetitive, i need to advise my account which way i should progress and i want to get my head around this.
thanks
S0805
Terryw wrote:jmsrachel wrote:kat13 wrote:We pulled out the equity on our house – 90K which got paid into cash into our offset account until we were ready to get something…but we are also using 30K for personal improvements which is maybe why it was done that way????We are currently waiting on preapproval for the rest (not sure how much we can get – but broker indicated up to 400K all up).
What should we be doing? What sort of account do I need to stash it in?
Can I be a pain and ask where should Kat put the money once the equity is pulled out as cash. Now that I have learnt not to put it in the offset, where do you park it? Or do you wait till you've signed contracts then organise to pull it out?
You have to be careful to pay the money straight from the loan to the investment without passing through any savings account. So best method is to use a LOC or increase the loan without taking the money and then use a bank cheque to pay the deposit etc.
Hi Terry,
I had identical situation and had just settled on my first IP. I need your opinion to understand if I've done this right or not. Bank allowed me to borrow $90K as equity of my PPOR as separate loan, when I was settling on $90K loan I advised bank to open new offset account and link it to $90K and put all money into the newly created offset (which they did), same day I wrote a cheque for 10% deposit of IP and given to RE agency's trust account. Have I done the right thing here?
Later on, I used rest of the money from this newly created offset on final settlement. Even after the final settlement this account still has 8K. I do not want to keep newly created offset as it is costing me admin fee. I had chat to my Account and he advised that i can park this 8K in to Offset linked to PPOR and when it come TAX time, he can proportionate the 8K amount (which has not used for investment purposes). Do you think it is right thing to do? Is there any better way this situation can be handled
thanks
S0805
luke86 wrote:This is complicated- I would get actual advice from a suitably qualified and experienced accountant rather than from a forum. Relying on something that someone told you in a forum is not the best idea.
Cheers,
LukeHi Luke/Terry,
Agree with you guys that using LOC would uncomplicate things in this scenario. And totally agree with Luke to say this is one of the best forum for property investment where ofcourse we don't completely rely on someone's suggestion or advise but nevertheless it opens up opportunity to talk to like minded people and discuss the strategy in open environment…invalaubale.
thanks all for your feedback, i will surely get some advise from accountants on this and will update as soon as I have answer.
S0805Rob G. wrote:Interest expense would form part of the cost base of a CGT asset, however the cost base is reduced to the extent that the expense is deductible.Costs of searching for a property do not form part of the cost base of a CGT asset. They are also a capital expense and therefore are not deductible.
The cost of agent fees are specifically mentioned as included in the second element of cost.
However, if no asset is acquired then you do not get to capitalise that cost.
Given that rent is income from property, and that you have not yet even located the property to derive that income, then there is a strong argument that these interest expenses are merely preliminary to an income producing activity.
This will be one argument that the Commissioner will use to distinguish your scenario from Steele's case.
If you choose not to deposit your funds in a 100% offset account against the original loan, and if you choose to claim anything prior to entering into a contract then you had better get some good legal advice.
The cost of competent advice may or may not be deductible, given that it revolves around an issue of capital acquisition.
Cheers,
Rob
Hi Rob,
thanks for your reply. Please correct if I am wrong here what you are suggesting is that buyer's advocate fee which will be used from this $95K is considered as cost base of a CGT asset given even if I'll draw $95K and put it against the offset account. My understanding was interest on this $95K I am getting which is only for the investment perspective can be claimed in deduction. As eventually this $95K will cover the deposit, stamp duty, legal fees, regsitration fees & buyer's advocate fees for my investment property purchase.
thanks
S0805First of all, thanks all for your feeback and time for my question.
Jamie M wrote:Hi S0805If the lender allows, set-up an offset against that $95k interest only loan. When the funds settle – move them into that offset. That way, you're not paying any interest on the funds until you use them.
Cheers
Jamie
This is an excellent idea, thanks for that.
Pjevans wrote:The tax act uses the word 'Nexus". There must be sufficient nexus ( or connection) between the use of the funds and earning assessable income, to claim a deduction. Therefore in your case, if you were to use some of the funds to pay for a buyers advocate to find you a property, to maintain that nexus, you would hope to have purchased a property within a reasonable time frame. If too much time has passed between incurring the expense and earning income ( or future capital gains), then the nexus make be broken….Good luck with your future purchase
Hi Paul,
Can you please advise from the ATO perspective is there any number to reasonable time frame as per your update. The expeirenced property investor I've talked to he advised me to draw $95K loan and put it against the offset of my PPOR and claim deduction on this $95K loan while I am looking for property but from your explanation and general feedback from this forum seems like it is incorrect way to go about it.
So basically, If I'll follow what Jamie has advised and use buyer agenct fees ( which is sitting in offset account) from this $95K loan I can claim interest atleast on fee for buyer's agent until i make purchase. Is that right?
thanks
S0805Pjevans wrote:As i'm sure you're aware, to claim interest as a tax deduction, the funds must be used for or towards income producing pruposes, be it capital or revenue in nature. Therefore, in your above senario, until the funds are used as such, you will not be able to claim a tax deduction…
I presume from the information you provided, you are having to draw down on the funds when the loan is establised. Otherwise, you wouldnt be paying interest. Therefore, what will you be doing with the funds until they are needed for a property purchase ?'. This will determine the interests tax deductibility.
If you have to draw the funds upon the loans establishment, then repay the funds back in to the $95K loan ( minus a small amount to keep the facility open). Then redraw as required. This eliminates most of the non deductible interest expense !
Paul
Hi Paul,
thanks for your reply. So basically as long as fund is not used for any purchases for investing purposes i can not claim that in tax deduction. Just the motive for the usage of fund is not enough?
To answer you question what will you be doing with the funds until they are needed for a property purchase ? I will be in market looking for properties or hire buyer's advocate to find me property eith their fees. I mean I will be redrawing 95K in Mar 2012 but i will not be spending this money until I make the property purchase ( e.g. in May 2012), the gap between Mar 2012 and May 2012 I'll be in market looking for properties or use the buyer agent's services but until I make property purchase i can not claim interest on this loan. Is that what you mean. Please confirm.
If that is the scenario then there is no difference of using this $95K as LOC or normal loan.
thanks
S0805Hi Luke,
Thanks for your reply. I am not against the LOC, it was just that I was recently briefed by expierenced property investor to follow this stratergy and not to go for LOC ( may be to avoild paying more interest for the life of loan). I also recently read somewhere that demand for LOC is down for the investment purposes as well.
Anyways if the bank agrees to give me that as normal residential loan do you think as per the above scenario, I will be able to claim interest from Mar 2012. I completely agree that money from this $95K loan should not be used for any other reason then investing to avoid any tax complication.
Also, If I use LOC with the similar dates and let's say I pay $10K to buyer's agent ( Mar 2012) from this $95K do you think I can claim the interest on $10K from Mar 2012.
Thanks for your help
S0805Thanks guys for your feedback and suggestions.
Hi Dean,
agree with Richard on this, your scenario can work. but that would cause cross collateralisation of securities.
Richard can you please look at my update on ‘October 18, 2010 – 3:30pm’ and advise what strategies should i use or how should i handle my cash flow?
thanks in advance
SaurinHello there,
very interesting, I have almost the same scenario as AM2778, the difference being I haven't bough my investment property yet. Very impressed with the way loan has been structured and gr8 input from Terryw.
With the same situaltion I'll try adding numbers to find out if I could have same options available or not. apologies in advance being stupid question…….
1) Loan 1 – PPOR
2) Loan 2 – LOC on PPOR (95% of the increased Equity) – Seperate Loan Facility
2) Used the LOC to pay deposit for the purchase of the IP. (Doing this I almost used my LOC limit)
3) Loan 3 – IP Loan set up (with the different Bank) but seperate Security – no cross securitisation.The way I prefer to structure the Loans and Cash Flows are:
1) Interest and Principal Repayments for Loan 1 gets debited from the 100% Offset Account Linked to the PPOR.
2) Rent from IP goes into an Offset Transaction Account linked to the PPOR.
3) Interest Only repayments for Loan 3 gets debited from the LOC on PPOR. (if I have used my LOC for the deposit and initial purchase I don't have any money there, what should I do at this step)
4) The Interest Only repayment for Loan 2 gets debited from the Offset Account linked to the PPOR.My problem is my LOC is not that big and it is very possibility that I'll be ending up using all of these money as deposit and legals for my IP.
what strategies should I use then? or this stratergy still applies to me, or do I have to keep going to bank depending on my increased equity on PPOR to top up my LOC.
Please advise.
thanks
SaurinHi Guys,
thanks for your input so far. Cross collateral means using 2 properties to secure one loan.
I think as I am starting out in property investment and using equity from PPOR, i guess regardless the way I arrange, my PPOR will be used as secuity. I think this technique becomes handy when i'll buy my second IP, i will be using equity of my 1st IP rather than 1st IP + PPOR.
Terry, Can you please explain below. I didn't get this.
Terryw wrote:If you had avoided CC you would not have a problem – with the bank anyway, but you would still have the problem of owning a house with a value less than the loan. But the bank would not know this.thanks
Saurinhi
thanks for that. as per this scenario I have avoided CC but what are you suggesting is bank if require can have access to my PPOR (as security) if i default on my LOC.
so can I ask what is cross collareral is then. as for this scenario i definatley haven't kept the banks hands off my PPOR even avoiding cross collateral.
thanks
Saurinthanks a lot for your input guys.
Correct me if I am wrong here. the interest occured on Loan B would be deductible, cause it has been borrowed with intention of covering capital costs for my IP. Please note I am talking about the interest here not the actual amount. Actual amount like stamp duty and stuff will only come in play when I decide to sell my IP Property for CGT.
Loan B and Loan C both would be tax deductible and would interest only loans (Assuming my IP for Loan C gives me loss).
Interest only payments for Loan B would be deducted from my Transaction/Saving account with Bank A. (No Principal be paid in Loan
Interest only payments for loan C would be deductible from my Transaction/Saving account with Bank A as well, unless Bank B forces me to open Transaction/Saving with them, in that case it would deductible from Transaction/Saving account with Bank B.
(No Principal be paid in Loan C)My rental payments will automatically gets credited in to my Offset account which is Loan A with Bank A (Being bed debt).
Does this sould right or is it feasible to do?
thanks
Saurin
