Hi,
This has been put to me as a strategy for obtaining IPs and I am curious about the potential tax implications.
The scenario is as follows:
- Access equity on current owner-occupied property and withdraw an amount off my owner-occupied property as the deposit on an IP – for example, I might use $25K off the owner-occupied. Of course, I get additional interest on the owner-occupied for this withdrawn $25K.
- Get the remainder of the money to purchase the IP from bank/broker, etc.
- Against the IP, make the usual tax claims – in this case, a negatively geared investment property.
- Allow time to pass and allow the IP to go up in value.
- When the value of the IP has increased enough, re-finance the IP and access the original amount of $25K and put this back onto my owner-occupied property – effectively recovering the original amount used as a deposit.
Now once I re-finance and take the $25K off the IP related finance, is all the interest on the IP claimable as a tax deduction?
Hi
This is an old fashioned strategy which many will mock as it does not fit the modern stereotype of what your "ment" to do
1. Even though century's have passed since the Acquisition of your 2006 SS and you will be clearly made fun of because you didn't get a new loan you could'nt afford for the new model you decide to go ethiopian style and put it of, Just a little longer.
2. Your popularity rating will substantially drop but you stop spending $100 a week on the newest ring tone and just went for 1800's style ring ring custom tone
3. Instead of getting 4 pizzas on Thursday to watch Australian Idol you have a sandwich instead
4. Slave labor is bad but you decide to up the ante and work 35 hours a week from now on
5. Wow, Before you know it you have a nice big house deposit sitting in the bank, So you waddle down with your jeans that are now falling down your waist from consuming less pizza
1 – if you take money of your PPOR, then these funds are for investment and may be deductible – absolutely nothing wrong with using existing capital for investment
The issue becomes if you then borrow (refinance) to pay back your house – this is nondeductible finance. You may need to consider parking some of the money paid on the IP in an offset so that when you refinance, you can use the money in the offset account without drawing any attention.
The only potential problems is with 5. this plan will only work if you take the money from step 1 as a separate loan split. Otherwise you could not attribute all the money you pay back to the investment portion.
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
I don't really understand why you do not use the equity in your home for everything that you need in the investment property.
You seem to be going to an awful lot of trouble to make your investment property as negative as possible in order to get a tax break, and then worrying about the after affects of paying yourself back the $25,000 deposit.
I would be getting a line of credit for the investment property using the equity in your own home and making the investment property as positive as possible. Capitalise your expenses for the investment property and use any spare cash to pay off your personal mortgage.
Denise, you are on another planet.
Why would you need a LOC for the Investment Property. What transactions are you planning to make other than monthly interest payments?
Also, Glen IS actually using the equity in his own property to get the required funds for the IP.
Thirdly, I am sure you are not advising him to cross-collateralise the two properties. If so, we may need to launch a probe to your home planet to see if there is any trace of intelligent life?
Irrespective of the above, the gearing of the property will not change, as the same amount of money is required to complete the transaction. The entire purchase price, and any associated costs.
Glen, go for it mate. The outlined plan is very, very basic, and easy to manage. Free up your deposit and costs by taking out an additional split on your O/O, and use it to purchase the IP. Claim the interest on the new split, and the entire IP loan. Deduct your purchasing costs etc over the relevant tax periods (usually 5 years 'pro rata), and reap some tax benefits along the way.
Best of luck mate.
Dear all,
Thanks for your comments.
At the risk of sounding naieve, I was hoping to return the initial deposit on the IP to my owner-occupied home, and get the mortgage payments back down or repeat the process and buy another IP. Another approach perhaps is to re-finance the IP provided there has been sufficient capital growth and use a portion of that growth for the next IP.
At the end of the day, I expect the tax office to look at "what purpose has the money been borrowed for". I will have to work it out from there.
The reason for the LOC is to have a clear separation between your personal use (PPOR) mortgage and your investment loan for the deposit for tax purposes.
Also you can borrow the rest of the loan from another bank and then pay back the LOC and if you need to borrow it again it is easier to access the line of credit already established even if you pay it down to zero dollars.
The other bank is used to provide a seperate security against your investment loan so that if you fail to pay the investment loan you lose the investment property and the $25,000 deposit rather than lose your ppor house as well.
Tims comment on
Also, Glen IS actually using the equity in his own property to get the required funds for the IP.
assumes you will cross co-laterilise the PPOR and the investment loan and thus not need a deposit at all
However there is a risk of having the PPOR sold if the investment house doesn't sell for as much as the investment house if Glen defaults on the investment loan..Duck,
You should read more carefully before replying to some posts. The LOC comment above was referring to a LOC on the Investment Property, not taking out a LOC on the O/O to put a deposit on the IP.
Also, I am well aware of the reason not to cross colateralise the properties, which is why my comments 'assume' nothing. What I wrote was to take out an additional split on O/O to get the deposit funds, and then borrow the rest for the IP. Nowhere in my post does it say to cross collateralise the properties. Rather than commenting I assume something, why don't you read the post a bit more carefully first. Thank you in advance for your assistance.
626 posts and still you can not read properly is a bit of a worry.
Cheers.
Please accept my deepest apologies Tim.
Duck
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