Tax Effective Debt Restructuring

Yeah I sort of see your point. Let me re-think it

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OK it seems to me that this is a way of getting some income. I see to some extent the tax neutralization argument, but the point is that you get income to live on by making some properties positive cash flow, whilst carrying a large debt on another. I mean you cant actually use the redraw to fund living expenses and claim the interest as a tax deduction. Thus by re-diverting the funds into other properties you make them cash positive and thus still get access to funds that way. This income can then be legitimately used for personal use. The interest then still becomes tax deductible as its is paid against the redrawn amount that is channeled into the other investment properties. You are still paying income tax on the cash positive properties, but as you say its sort of neutrally offset by the loss on the property that you drew down on. So in effect you get a tax deductible income stream .

Do you think that makes any sense ?

Yea I would need to do my own calcs. I guess the point is that even if its neutral, the income is income you would otherwise not have access to.

Say you had two properties worth $100K both cash flow negative and owed 70K on each.

The you redraw 20K on property B to put against property A

Thus now

Property A owes 50K and goes cash positive

Property B owes 90K and remains cash negative

Thus

Income stream from A say is $100 / week
Interest on A is $58 / week other expenses say $30 / week thus net cash profit on A is $12 per week

Income stream from B say is $100 / week
Interest on B is $104 / week other expenses say $30 / week thus net cash loss on B is $34 per week

But the tax benefit may be ineffectual perhaps ? As the net profit / loss is merely being shifted between the two properties?

I guess the only way I can see to improve the situation is to have your property revalued and then borrow against that so you can borrow more money against it the fully pay off property A so it generates more cash flow.

Its really an argument of cash flow and where the funds are coming from rather than what offsets what. From a legal tax standpoint I mean. The flow is diverted from cash drawn down that you cannot spend for personal use, but put back into other investments that generate income which you then can use for personal use.

Thus even if the net monetary effect may be neutral, the flow of money in terms of its source and the tax rules that govern interest deductibility on redraws etc… seem such that by re-diverting the flow of money it becomes usable for personal use and yet the interest is still deductible on the redraw.

I’m still learning. just a thought.
back to the drawing board ! i will keep trying.

Scott,

Can someone inherit your debt on a property ? I mean you could draw down say 90% then sell for a small CG well under market value with a private sale, then get the buyer to pay off your debt to the equivalent amount that you undersold the property for. Hey they both win with less CG tax and less stamp duty. hehe.

Reckon that would be legal? Admittedly when the buyer then on sells, they will face a bigger CG tax burden due to buying it under market value up front. Perhaps there’s a meeting point half way somewhere. Draw down 50% and sell the property at an equivalent discount. Buyer pays off the 50% loan but pays the equiv amount for the sale.

1. Is it legal to pay off someone’s debt
2. Is legal to sell under market value.

I know it sounds a bit scammy, just a thought.

cheers.

Aahhhh good idea to get those title deeds back ASAP. At least on the roof over your head.

Thanks Terry