Hi! On page 295, under the heading: “The Bottom Line” it says:
“That’s why I believe that the argument for funding your financial independence using equity is both flawed and dangerous. Once you’ve retired and you have little or no salary income, I would have thought that the last thing you’d want to do would be to create a situation where you have substantial loans of which an increasing portion of the interest must be funded from pre-tax earnings.”
… I don’t understand why once you have no salary, why an increasing portion of interest would be funded from pre-tax earnings. If interest on loan repayments were tax deductible when you did have a salary, why wouldn’t interest still be tax deductible once you had no salary?
(Unless of course, you had so few properties and such a low passive income, that you didn’t earn enough to pay tax in the first place!?)
Allan.
i think what was being referred to in that section is the strategy that involves buying, for example only,
10 properties, interest only, and when you are ready to retire from the workforce, refinance and redraw funds using whatever capital growth you have gained in the last year or so, and live off of the borrowed funds, as long as you never redraw more than the property has grown in value, you can keep under a 80%LVR. Tax free funds to live with, but these would then not be tax deductible as they weren’t used for an investment, they were used as spending money.
It’s a good idea for those that want that strategy, there are also better ones obviously. Ones where the rent pays the loans and puts money in your pocket to live off of.Allan, as ryanmel pointed out, in this scenario, you would need to keep the loans separate. ie $100K is your original loan to buy the property, but now due to incrased equity you could borrow $60K to live off. The interest on this loan is not tax deductible.
I’ve got no problem with that though. I would borrow $60K, live off $50K, and use the rest to make those interest payments, and have a bit of a buffer.
Cheers
Mel
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