Hi,
I'm setting up my finances for my first IP. I intend to get an IO loan with a LOC.
The intention is to target a capital growth IP and evetually extract thr equity via the LOC for a new deposit on the next IP. I intend the LOC to be for investments only. Is the interest on the LOC that gets used for a deposit tax deductable?
Hi osaurus
Firstly welcome to the forum and I hope you enjoy your time with us.
I think i understand your question and if so the answer is Yes however in saying this I am not sure you have set the facility up correctly. A little more information would however be needed to make a proper recommendation.
Richard Taylor | Australia's leading private lender
If you borrow money to invest, then it is generally tax deductible. Taking money from a LOC is borrowing money. I would keep the LOC totally separate – no personal use at all if possible. Also look into borrowing from the LOC to pay expenses and keep your cash available for personal use – put it in your offset on the home loan if you have one.
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
Thanks guys,
All borrowings would be for investiment purchases only. My IP1 would have an IO loan, I intend to then take out an LOC on that same property for a deposit on the next property IP2. This seems to be covered in the answers provided.
For the LOC on IP1, do I have to account for the seperate interest payments that are occured as a result of using LOC on IP1 for a deposit on IP2 (ie seperate tax schedule for 2 loans against the same property, the IO for IP1 and the deposit for IP2). Or, can both the interest for the IO for IP1 and the deposit for IP2 (both borrowed against IP1), by claimed against IP1 for simplicity?
My intention is to use capital growth to replicate to the next property. I am trying to get my financials set up correctly so that i don't run into bank trouble later on when i decide to use my equity for more purchases.
Many thanks.
Hi O
That sounds like the way most do it. For tax reasons you will need to apportion the interest between properties – tho overall it should be the same, and it is easy to work out as the loans will be IO so it should be a straight percentage used for each property.
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
Terryw wrote:If you borrow money to invest, then it is generally tax deductible. Taking money from a LOC is borrowing money. I would keep the LOC totally separate – no personal use at all if possible. Also look into borrowing from the LOC to pay expenses and keep your cash available for personal use – put it in your offset on the home loan if you have one.Hi Terry,
If you have a LOC and borrow from that to pay all your expenses, i.e. a mixture of personal and investment, how do you work out what’s deductible or not come tax time?
Kenzel
Hi Kenzal
That would be messy! But i think many people are in this boat. I think what happens is the expenses should be worked out on a percentage. eg if the balance is $100,000 and you have used $30,000 for investment/business then only 30% of the interest is deductible.
But it gets even messier. If you were to deposit money into the account over and above the interest, then this has to be apportioned against the splits in the same percentages. You cannot just say all the money will go off the principle of the personal portion. eg. continuing with the above scenario, 30% investment/70% personal. Say you paid $10,000 into the loan. You cannot reduce your personal portion to $60,000 with this – you could have to attribute 70% of the deposit to the personal portion and 30% to the investment portion. Messy isn't it.
Imagine what would happen if you are doing monthly deposits like this.
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
Terryw is correct. The interest repayments on the "mixed" LOC will have to be portioned based on the existing % between private and investment portions of your LOC principal.
Read Tax Office's TR200/2 – paragraph 20 explains how to calculate the deductible investment portion of interest expense. But you will find it is a very messy process.
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958
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