Does anyone have any advice that may help my situation?
I started my realestate portfolio with 3 investment properties prior to purchasing an owner occupied residence.
I have sufficient equity in the investment properties (about 20% each), to pay out my owner occupied mortgage, which would then allow me to borrow against my owner occupied equity to purchase investment properties.
A part of my plan is to buy back two of the investment properties I own. Does anyone know how I can do this in a cost effective and legal way?
The reason is to reassign all of my debt to investment properties instead of my owner occupied home, and thus make it possible to improve my cash flows.
I wouldnt like to give advice on this one as it is really something I feel an accountant would be best answering – i would recommend an appointment with your accountant or one that specialises in property investors tax and get them to set up a way to structure this and then go to a broker who will be able to organise the finance side of things for you.
Anita Marshall
Advanced Finance Solutions
http://www.advancedfinance.com.auHi Mogul,
As the purpose of your refinancing is to ‘buy out’ your PPOR the additional or transfered borrowings will remain non-deductible.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Derek is spot on.
You cannot simply transfer debt like that to change the deductibility. There are however, ways to swap non deductible debt to deductible.
Some are fast and cost a substantial amount in stamp duty others are free but slower.
It should be the goal of all investors to have 100% of debt tax deductible.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi Mogul,
If you are not borrowing to pay all of your IP expenses then that is your starting point. It sound simple but a lot of people do not do it.
For example, if your properties are managed by an agent, do not allow them to pay expenses on your behalf out of rent received. Pay it yourself from borrowings. Borrow the money for Insurance, Body Corp, rates, land tax.
With 3 investment properties, you no doubt have $000 of expenses each year.
Make sure that all of your rent goes into your PPOR.
Make sure that all of your IP expenses are paid from borrowed money.Mal
Getting out of your comfort zone, can help you become comfortable
Hi Shwing,
That sounds like a fantastic idea. Never thought of that. I’m pretty sure interest on interest is tax-deductible but not interest on principal repayments. I have to check with my tax experts. I have been struggling with that idea too – how to extract equity out of my IPs and use them to buy a PPOR without selling the IPs (triggering unnecessary agent fees and taxes). The other strategy was to buy and live in a trust owned property but ATO is all over that one. I couldn’t see any other way around it. But with your way, I can have all the rents pay down the PPOR mortgage and steadily increase the good debt on the IPs or use LOC. Does this mean on a $1M loan across a few properties at an average interest rate of say 6.75%, I can increase my LOC by $67,500 per year and reduce my PPOR debt by all the rents I receive from my IPs? Loan will probably be more if you add in b/c fees, rates, PM fees..etc.. Best news this month!
ASDF
Derek,
I’m not sure I understand your rationale.
1. I intend to sell my IP’s to repay my mortage on PPOR.
2. My PPOR is now owned free and clear of mortages.
3. I now wish to buy some IP’s.
4. It would be nice to be able to buy back the IP’s I sold in Step 1, thus making all of my new debt investment debt. I was hoping someone here had a creative (but legal way) of doing this.
5. I may be better off skipping out step 4 and just starting all over with an improved structure, because I am suffering big time with my PPOR mortgage. I have taken the other tips on board for use in the mean time. I have plenty of number to crunch yet before I go and sell out, with CGT, SD and Agent fees to weigh up.6. Keep the good advice coming. Don’t be afraid to wear your heart on your sleeve. I’m sure that we are all mature enough as investors to do our own validation of information before we go ahead and use it.
I hope this better explains what I’m trying to achieve, I thought it was a long shot. I do intend to see an accountant in due course, but its always useful to get some tips from the real experts(people who actually invest) first.
Cheers
Originally posted by asdf:Hi Shwing,
That sounds like a fantastic idea. Never thought of that. I’m pretty sure interest on interest is tax-deductible
Interest on interest isn’t deductible and that isn’t what Schwing was suggesting.
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by mogul1975:Derek,
I’m not sure I understand your rationale.
1. I intend to sell my IP’s to repay my mortage on PPOR.
2. My PPOR is now owned free and clear of mortages.
3. I now wish to buy some IP’s.
4. It would be nice to be able to buy back the IP’s I sold in Step 1, thus making all of my new debt investment debt. I was hoping someone here had a creative (but legal way) of doing this.
5. I may be better off skipping out step 4 and just starting all over with an improved structure, because I am suffering big time with my PPOR mortgage. I have taken the other tips on board for use in the mean time. I have plenty of number to crunch yet before I go and sell out, with CGT, SD and Agent fees to weigh up.6. Keep the good advice coming. Don’t be afraid to wear your heart on your sleeve. I’m sure that we are all mature enough as investors to do our own validation of information before we go ahead and use it.
I hope this better explains what I’m trying to achieve, I thought it was a long shot. I do intend to see an accountant in due course, but its always useful to get some tips from the real experts(people who actually invest) first.
Cheers
You can sell your IP’s to your partner or into a trust but you will have to pay stamp duty again. It does mean you can top the loans up to 100% plus costs and it will all be deductible.
There is a cheaper yet slower way as Schwing described.
Divert all IP income into your home loan and topup the home loan for every expense (less interest). This will gradually transfer the non deductible loan into the deductible one. Like I said it is slow.
Where are you located and I might be able to suggest a savvy accountant to speak to.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by mogul1975:Derek,
I’m not sure I understand your rationale.
1. I intend to sell my IP’s to repay my mortage on PPOR.Hi Mogul,
This part of the plan was not evident to me in the initial post, hence the belief you were considering a refinance IPs to pay out PPOR process which is a question often asked here.
The other comment I would make is to consider the CGT liabilities when selling your IPs. Selling all/most of your IPs within the one financial year will increase CGT liabilities.
You may, if this is still the preferred option, to consider staggering the sales.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958ASDF,
Sorry I did almost put in my post that I meant all expenses, except interest. You still have to pay that.There is really only a benefit of borrowing all expenses while you still have a sinificant debt on you PPOR. Once the PPOR is paid down, then start paying off the IP Debts.
Like Simon said it is a slow way of transfering non-deductable debt to deductable debt, but as Mogul has 3 properties, this expense may be say $10,000 a year. Over 5 years, you can have transfered $50,000 to a deductable debt, and knocked years and $’000 off you PPOR debt.
Mal
Getting out of your comfort zone, can help you become comfortable
Hi Simon and Mal,
Are you guys sure that interest on interest is not deductible? I asked a friend who works in tax and she sent me this exerpt from her email.
The Commissioner’s view is that:
“Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income”.To me, that means interest on interest is deductible and to stretch the interpretation further, even the capital component. We currently have a structured investment product out there which is sold on this basis (which have had partner sign-off from one of the largest law firms in Oz) so I can’t see why the same logic can’t be applied to IP loans.
Has the ATO made a specific determination that interest on interest for IP loans specifically are not deductible?
Curious to find out cos am just about to start sorting out my finances in setting up a few different savings and investment accounts in the New Year. Thanks guys.
ASDF
Interest on a new loan – yes.
interest on interest = capitalising interest = no.
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
ASDF,
What you don’t see in that excerpt is that it also depends on the reason for the loan structure that you set up.
IE. You are suggesting that using a second loan to borrow interest on the first loan, purely to shift debt from personal debt to investment debt and avoid paying so much tax.
Any interest paid on a loan structure set up to purely avoid paying tax is not deductible. Which a structure like this wreeks of, and hence would not be deductible.Mal
Getting out of your comfort zone, can help you become comfortable
I’ve had conflicting advise from various accountants on this. Many have argued that interest on interest can be deductible if the money is borrowed for business purposes. One described it as a common practice for business to borrow money to pay for interest – to help cashflow.
Terryw
Discover Home Loans
Parramatta
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Interest on Interest tax deduction has been ruled out by the Tax Commisioner.
See High Court ruling may 2004. Case: Richard and Trudy HartThe Hart case relates specifically to the use of Split Loan accounts for the purpose of compounding interest.
Mal
Getting out of your comfort zone, can help you become comfortable
Hi Barb
The Hart’s case involved a certain loan product which was classed as a scheme to avoid tax – hence Part IVA applied. It was done with the dominant purpose of obtaining a tax benefit. It was a case involving investment loans – not about borrowing business expenses.
I have been advised that it is still possible to do something similar if you set it up differently. ie you can borrow to pay business expenses including interest and the interest on interest will be deductible.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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