Just wondering if any one is able to offer any loan structure advise on the following
We are lookiing to purchase an IP for aprox 120k in regional NSW.
Currently we have a line of credit for 130k sitting there that we have not drawn on (it was set up 12months ago with a view to use if for renovations to our PPOR which did not happen)
The line of credit is serured against our PPOR which is held in joint names with my wife.
For the purchase we are considering using this line of credit to buy it out right and cover purchase costs, then have the option to re-finance at a later date if we wish (perhaps when the LVR get's under 80% to avoid cross securitisation.)
I understand this will effectiavly tie the loan to our PPOR and leave a clear title on the IP.
1. Will the interest on the line of credit be tax deductiable regardless who's name the IP is purchased under?
2. does this sound like a good way to make the purchase?
any coments would be apreciated.
Sounds like you’ve skipped at least 2 steps in a solid investment plan… Before you consider the best loan structure, consider your objectives first and then your ideal asset structure.
Talk to your accountant and read lots of books for these. Education and preparation are everything. Just like the house you’re planning to buy, if you don’t have solid foundations to your plan your investments are likely to fall down around you.
THEN talk about loan structures.
I don’t know the answer to question 1 but as for question 2, refer above.
Don’t rush into anything, the deal of a lifetime comes about once a week. Good luck!
Hi Lake
Welcome to the forum and I hope you enjoy your time with us.
I agree with Imulli that you need to decide what your investment objectives are before you decide on a what entity you intend to use. A different entity would be used for a + geared property compared to a – geared property and the same depending on whether the property is a buy and hold or a buy, renovate and sell.
In saying this irrespective of how you buy the property how the loan structure is certainly important and whatever you do on the basis that the property is to be longer term buy and hold do NOT use your Line of Credit to acquire the property for cash.There are a couple of ways to of structuring the loan to avoid X Collateralising the 2 securities and still borrowing 100% plus costs but care needs to be taken in setting this up.
Without more information it is difficult to give you structured advice so feel free to drop me a line with a little more detail if you would like me to make some suggestions.
Richard Taylor | Australia's leading private lender
I generally think it is a good idea to pay cash for a property with a LOC, reno and then mortgage it based on the new valuation. You should be able to get a higher loan amount relatively easy without the fees and hassles of increasing a loan.
What you would be doing is borrowing the money from yourselves. This money is then lend to A or B or both. You can then claim the interest as the loan was used to purchase an investment. When you mortgage the loan you are repaying your LOC which is just like refinancing really. So you should not have any tax issues. The person borrowing the money, the title owner, should be the one claiiming the interest.
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
OK thanks for your comments.
Terry's response was along the lines of why I thought it might be a good idea to use the LOC as an easy way of purchasing now and re-structuring later
just wondering why Richard thinks it was NOT a good idea to purchase the iP with our LOC.
For some more info
*we own our PPOR outright and the proposed IP would be the only borrowing against the LOC (as i see it -making the interest charged easy to relate back to the IP for tax purposes)
* Property would be intended to be a buy and hold deal
*IP would be slightly negative geared. I currently have 4 negativly geared IP's in my name (with a more traditional loan structure of seperate loans for each property paying interest only) while my wife who is also working, does not have any under her name.
*Also I will come into a land tax situation in NSW with more land in my name, which is another reason why we were considering purchasing in my wife's name.hope this makes it a little clearer
Sorry for the delay in coming back to you on this one.
Whilst i agree with Terry you would use your line of credit if the property is to be substanially renovated with a few lenders allowing for revaluations to be done immediately you have settled (if there is a reason why the property has increased) I cannot see any reason why you would not secure the majority of the loan against the security itself.
Assume you purchased the property for $200,000 then i would be looking to take out a standalone IO loan against the new IP for $160K and maybe use the LOC for the deposit and acquisition costs. You could link an Offset account to the IO loan and at least save interest especially given that you have no non deductible debt.
Secondly I would split the LOC so that you can easily identify the interest which can be allocated to this property alone and then if you repeat the exercise down the track have a second loan split for the next IP.
Remember if you deposit funds into the LOC whether it be wages, rent or other forms of income the interest on the redrawn amount is only deductible if the purpose is for investment.
Call me old fashioned but i like my offset accounts. Traditionally LOC are charged at a slightly higher interest rate and every dollar you can save helps the overall cash flow position of the deal.
Richard Taylor | Australia's leading private lender
I am not sure I follow Richard's reasoning.
I am thinking it would work like this:
Say the property is worth $200,000. The full amount plus stamp duty etc would be borrowed from a LOC. Ideally this LOC would only have been used for investment purposes or would be unused at present. The property would be done up and maybe funds for this would be taken from the LOC as well. After a month or so the propperty may be worth $250,000. Lakeinnes would then approx lender A and take out a 80% LVR mortgage of $200,000 IO with offset account attached. The money from this loan would go back into the LOC covering nearly all the initial funds used.
There should be no adverse consequences tax-wise for using the LOC as the new loan is a refinancing of the LOC loan. One loan is being used to repay another.
The advantage of this method is the client may be able to borrow based on valuation rather than purchase price and if things go well, they may be able to replace most of the money back into the LOC where it will be ready to be reused in the next project.
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
Great
Thanks very much for all your advice.
It has helped.
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