Redraw boo-boo …

Hi Simon,

Yes I understand what you’re saying, but what I’m asking is; let’s assume that you DON’T use it for a holiday.

That is, you have a LOC for 100K which you max out on the purchase of an IP for the same amount. You now have 0 funds available to you. Then you drop 10K into the LOC and reduce your interest and leaving you 90K in debt. Of course if you take the 10 back out and go spending on a holiday or whatever it is non-deductible, but say you redraw the 10K to use as a deposit on yet another IP, then I would assume this is not “personal”.

I think we’ve gotten our wires slightly crossed. I read Pepper’s comment and saw that what she was saying was “yes but if you use money to buy IP and you have documented proof of “investment” expenditure, how can ATO class it as “personal” expenditure??? Which is what lead me to my question re your response to Pepper’s comment.

And somewhere along the way it got fuddled up!!! [blush2]

Jo

Simon
I just read your post above and hence edited mine here accordingly. I think this satisfies my curiousity; many thanks for your patience Simon.

Sorry I haven’t been on line for over a week. Good to see this topic is getting a lot of responses as it needs all the publicity it can get.

Bennido:
I think what Julia is saying is that for IP loans, having an offset account is better than LOC for tax simplification. You can move money in and out of the offset account without affecting the tax deductability status of the loan. While at the same time, reducing interest paid. Sorry if I misunderstood you, Julia !

Yes you have got it in one.

I had a client who put the money from the sale of his home in the IP loan account for only a couple of weeks until he settled on his new home. He was so outraged when I told him he asked me to put in a ruling request to see if they would really be that unreasonable. The response from the ATO was bad news, the interest on the IP loan was no longer deductible.

A couple of weeks ago I applied to the ATO on behalf of a client who did nothing wrong his bank stuffed up by putting the money into the IP loan. I will let you know how that one comes out.

Yes it is ok to draw more money out for another investment property or to pay bills associated with the current IP.

If you sell a property you are only required to use the proceeds of the sale to pay off the portion of the debt associated with that rental property. Any funds left over can be used for private purposes.

On the otherhand if you sell the property for less than you owe you can continue to claim the balance of the loan as a tax deduction providing you stay within these guidelines:
1) All the proceeds of the sale should be used to repay as much of the loan as possible.
2) Endeavor to appear to be unable to repay the loan from other assets other than the family home. This may mean as a couple if only one member owned the property sold at a loss the other member should hold any further investments.
3) Don’t refinance the loan to extend its term or increase the interest rate. You must appear to be doing all that is possible to eliminate the loan. So refinancing to reduce the interest rate is ok. On the other hand if you have to change the loan from principle and interest to interest only because that is the only way you can afford the repayments you may be able to justify changing the loan.
4) If the loan is already fixed at the time the investment is sold, then you have an argument that you could not pay it out. This is a factor to consider if you are refinancing before the sale.

The whole story is in the Claimable Loans Booklet on my web site http://www.bantacs.com.au

Julia Hartman