I am moving and need to rent out my home. I have a home loan, with about 80K available in redraw (as I a have been putting all my savings off the loan). In about a year I would like to buy a home in my new location. Do I redraw the money now or wait until I want to buy another home? What are the tax implications?
ThanksHi Gyn,
I posted a reponse in a similar thread this morning:
You also have to be careful how much you claim as a tax deduction on the "first" property you purchases (the one that will become your IP). You gotta be careful that your current loan balance on that IP is not "infected" by redraws for private usage. E.g redrawing from that home loan to pay for holidays or groceries.
If "infected" it would be hard to apportion the loan balance between investment related and private-related. Hence the interest expense each month would be difficult to apportion as well.
It depends if you have an offset account, used a redraw facility or just paid the bare miminum loan repayments since the start of the loan.
You have to be careful by taking a redraw you run the risk of creating a loan balance that is a mixture of investment related debt and private related debt (I assume the $80k is to be used to buy another home is private usage). Any future interest expense from that loan (after taking the $80k redraw) will not be 100% tax deductible. You will have to manually apportion it out each month when doing your tax return.
Numerical Example
Existing Loan balance is $150k (with capacity to redraw $80k). If you redraw $80k (for deposit on your new home), new loan balance becomes $230k. But the interest expense from $230k balance going forward is not 100% tax deductible and you have to split the expense into 2 portions: 150/230 = 65% is tax deductible and 80/230 = 35% is NOt tax deductible. So if the $230k loan incurs say $18,000 interest expense per year (8% of $230k), only 65% (equates to $11,700) is tax deductible.
The above can be easily managed if you only made one $80k redraw and no more. It gets complicated if you made multiple redraws prior to you renting the old property….then the % split calculation is not so straight-forward.
If you are taking out another loan for your next property, I suggest using an offset account to maximise your tax-deductible interest.
I have a situation that demonstrates how this system can be overly restrictive. If things start getting hairy here and the banks start looking a bit dodgy – which is remote I know, but not infeasible and I’d be happy to argue the point, but moving on – I could consider paying off some of my loans.
Why would I do this? Because as it stands I have cash and loans. The problem is that if my bank can’t pay back all my deposits and go bust it’s not simply a case of I owe the net, it’ll be a case of I still owe all of my loans to whomever bought them from the liquidator and hope for the best in terms of getting my cash back. (As a side-bar this is a classic example of why the Australian Government is not debt free, much like me they are debt neutral, i.e. the balance of their creditors equals what they are owed. Problem is they are owed money by the likes of the Solomon Islands and Fiji).
One way of protecting myself is to pay off my mortgages with my cash deposits, leaving only a small debt to the bank. The problem is that I can’t reverse that transaction. If I take out my cash at a later stage I can’t claim a deduction on the interest on the amount I redrew. Perhaps I could if the money I took back out was used for investment purposes, but it would get messy as some of it is used as private funds and some of it is just in interest bearing cash accounts.
In fact this is the case even if you pay it off and then redraw it a day later (according to the ATO).
So, if things do go "Grapes of Wrath" I have to make the choice between reducing my risk totally, but paying the price of not being able to claim substantial deductions in the future, or taking a higher risk by keeping the cash. On Steve’s web seminar he advises that cash be spread about in this situation, which is an option, but it has its flaws; on the up-side you lower your risk of losing the lot by placing it in multiple institutions, but you also increase the risk of losing some by the virtue of having the money in more than one bank.
Anyway, it’s a bit moot at the moment, but who knows, and it’s better to consider these things when you have time to rather than be forced to make rash decisions in a hurry.
I’d welcome any comments/advice about how I could redraw the money in the future and not disadvantage myself..if you withdraw money from a loan it is treated as being new borrowings. So the interest on that money will only be deductible if the funds are used for investment purposes or business purposes.
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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