Lines of Credit

regarding the capitalising of interest on an investment property, then this is not necessarily a no no.

I have heard that one person was paying an investment loan with a LOC (no it doesn’t have to be a LOC!!!). She then only pay the interest on the LOC.

eg. $500,000 loan, monthly interest is $2916. This interest is paid with money drawn from a LOC. ie it is borrowed. In the first month, the interest on the LOC balance (of $2916) will be $204. This is paid for with cash. So you are borrowing money to pay interest, and then paying the interest on this money.

This is one way.

Another way is to simply borrow money from the LOC to pay the interest and to let it capitalise.

There are plenty of businesses that operate this way – on borrowed funds. Running a property portfolio is a business.

If you are using a company or trust it should be easier to do.

BUT I am not an accountant, so please don’t try this at home unless your accountant is happy to proceed.

ps. Any accountants out there willing to comment?

pss. I am not doing this, as my home is paid off, but wish I had found out about it sooner.

Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]

Any money not spent on paying interest on investment loans could then be diverted to the person’s home loan, paying it off sooner.

Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]

Rob, the Hart’s case was about a specific product and situation. I am not an accountant, and don’t do this myself, but apparently it is still possible to capitalise interest legally.

This could enable people to pay off their home loans quicker, and claim more back in tax. So anyone wanting to do this should probably talk to a few accountant’s about their situation and see if it is possible.

Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]

The Hart’s case is not about capitalising interest in general. It was about a scheme entered into with the dominant purpose of generating tax deductions.
The appeal is at:
http://law.ato.gov.au/atolaw/view.htm?basic=+harts%20v%20+compound&&docid=JUD/50ATR369/00001

Paragraph, 33 “The fact that the taxpayer had even a dominant purpose of obtaining a tax benefit would not, in my mind, preclude a deduction, so long as the combined test was satisfied. On the other hand, a finding that there was no other purpose of incurring a loss or outgoing than obtaining a tax deduction would.”

So, if there were purposes for capitalising interest other than for increasing tax deductions, it would probably be acceptible. Other reasons may include cashflow. I am sure that there would be many others.

Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]

Terry,

I said the following…

“It related to capitalising interest on investments to reduce non-deductible debt (amongst other matters).”

This meant that it addressed the issue of capitalising interest AS WELL AS many other issues.

You said…

“On the other hand, a finding that there was no other purpose of incurring a loss or outgoing than obtaining a tax deduction would.”

This clearly supports the point I am trying to make. Capitalising interest to increase deductions so you could pay off non-deductible debt sooner is an example of a deduction that is precluded.

All my comments relate to when the strategy is used for paying down non-deductible debt and I have qualified this by excluding cash flow or not being able to afford repayments at the time the interest is capitalised.

Just regarding cash-flow, I do not see this as a medium to long-term benefit anyway as you are exponentially growing your non-deductible debt (the capitalised interest) and have to eventually pay it all back.

Regarding the links you provided, I have made it clear that non-deductible and deductible debts are to be kept seperate using OFFSET accounts and NOT redraw. If you want me to go through it all again, I am happy to do so but I think it is very clear already if you read all the posts and the 3 page downloadable file I wrote.

http://www.mortgagepackaging.com.au/LOC_v_LWOA.doc

I don’t recall ever advising anyone to mix up their debt like often occurs with a LOC.

Robert Bou-Hamdan
Mortgage Adviser

http://www.mortgagepackaging.com.au

Investor Links

WOW!!!!

That is hilarious you telling me to be careful about advising about offset accounts. Although I am allowed to do so, I never tell a client what to do. I explain the positives and negatives of various options and the client chooses what they want. As a result, I rarely find myself organising a Line Of Credit. <corrected a typo>

Terry, if I was you, I would watch myself when advising about capitalising interest, taking a low doc or no doc when the client clearly can’t afford to and using equity to meet repayments the client clearly cannot afford to make. I would be most worried about advising a client to take a LOC with a much higher interest rate than a standard loan that does everything they want to do when they are driven by rates and you filled out the FBC acknowledging this.

Thanks for your concern though but I think I am ok.

Robert Bou-Hamdan
Mortgage Adviser

http://www.mortgagepackaging.com.au

Investor Links