Hi All,
I've been reading these forums for a while and now I'm motivated to clean up my situation. It is definately time for me to do something. I'm just not sure what!
Current Mortgages:
$135,000 Wife's IP (in her name)
$160,000 My IP (in my name)
$178,000 PPOR (in our names)
$40,000 PPOR – fixed
$109,000 PPOR – offsetWhat I’d like to do ideally is maximise the debt on the two IPs to get in as much negative gearing as possible and somehow reduce the debt on the PPOR (perhaps even pay it out entirely). Now my wife is presently not working so I was thinking of perhaps setting up an offset account against her property and dumping all the funds in that as negative gearing is not as important for her right now and that could allow me to maximise the debt on my IP.
Approximate property values (I've talked to real estate agents in the area) are:
$260,000 Wife's IP
$275,000 My IP
$475,000 PPORSomething which also peaked my interest was I was reading on the forums here that you can go for a Line of Credit on your PPOR to pay for the 20% deposits on your IPs and then the interest on that becomes a tax deduction too. So ideally it’d be cool to look something like below:
$208,000 Wife's IP @ 80% LVR
$220,000 My IP @ 80% LVR
$52,000 PPOR – LOC1 to pay 20% deposit on Wife's IP
$55,000 PPOR – LOC2 to pay 20% deposit on My IP
I've had some initial talks with my lender and they are more than happy to refinance both properties and will loan me up to something like $500k on top of where I am at the moment. Then there’d be some crazy amount of excess funds that I’d need to invest elsewhere. And I’d potentially have a lot of available equity in the PPOR to draw on for further investments too. Not a terrible situation to be in really
.So how can I get from current to ideal?
The 20% deposit from the LOC would be for NEW IP's, not re-financing a current IP.
The interest deductibility rule is basically, what did you do with the funds, so increasing the debt on your IP's to pay down the debt on your PPOR would not make the extra debt on the IP's deductible.
Hi Jadlak,
If you have debt levels against your IP of $295,000.00 with the Market Values of the IP of $535,000.00 @ 80% the banks would lend $428,000.00 aginst these properties. This would give you an additional $133,000.00 to borrow against your IP's which from my calculations should be able to pay off your PPOR (This is taking into account your offset amount of $109,000.00)
A line of credit can be a great way to get some equity out of your property for future investment purposes. (I.e. Placing down the further 20% deposit plus cost on an additional IP) A lot of clients have lines of credits in place for future investment purposes. The good thing about a line of credit is that you can draw down on it as you need.
Before making any decision on whether or not a loan is Tax Deductable, its best to consult your accountant prior to making any decision.
I hope this helps.
Thanks for your response Dan & Trent
@dan
How come I can't use LOC for re-financing? I thought a refinance was basically pay out old loan and get a new one. In which case I could use a LOC for 20% and an IO mortgage for the remaining 80% – thus giving me maximum negative gearing on the property.Also I thought that if I used the gained funds to pop in a offset against my wife's IP then that was for investment purposes, thus covering that rule. And then I could draw against the offset to fund future investments once my wife returns to work and we want negative gearing to reduce her taxable income.
@trent
As I understand it though, if I use the money to pay off my PPOR then the interest on my new loans is not tax deductable (which kinda negates the reason to pay off the PPOR in the first place if all I am really doing is shifting the debt to my IPs)Hi Jadlak,
That could be true, that is why I would always recommend talking with your accountant prior to making any decisions on tax deducatable debt. Everyone has a different scenario for their individual needs.
The problem occurs because your current IP loan is $160,000, and after re-financing it will be $220,000, plus $55,000 on an LOC. You have borrowed an extra $115,000. The deductibility of interest on this amount is based on the primary use of the funds. If these funds are used to pay down your PPOR, the interest on this portion would not be deductible, regardless of the security offered.
The offset account is an interesting idea, but I'm not sure it would pass the 'primary use' test, because the funds you have borrowed are just sitting in an account reducing the interest on your wife's loan. Even if you paid that amount off your wife's loan, you are just shifting the interest deduction from the lower income earner to the higher income earner. I think you would have a hard time explaining to the ATO why your interest bill was $12,000 one year and $20,000 the next.
Hi Jadlak,
I think you have the picture that if you are using equity from your IPs to paydown your PPOR, you are just simply transferring debt.
It does not provide you with any tax benefits.
This of course assumes that the existing debt on your PPOR was used for the purchase of your PPOR.You do still have the ability by the sounds of it to establish Lines of Credit on either your IPs or your PPOR. Any additional lending at this point in time would need to be serviced by your income alone and rental income.
Your would then of course use these funds for any deposit and purchase costs of a new property.Regards.
Dan42 wrote:I think you would have a hard time explaining to the ATO why your interest bill was $12,000 one year and $20,000 the next.maybe not: "Because I re-financed the property to pay down my wife's investment property that she is not able to sustain due to her not working presently"
or something along those lines.
Jadlak wrote:Dan42 wrote:I think you would have a hard time explaining to the ATO why your interest bill was $12,000 one year and $20,000 the next.maybe not: "Because I re-financed the property to pay down my wife's investment property that she is not able to sustain due to her not working presently"
or something along those lines.
What is the purpose the funds were used for? If the husband lend the wife money to pay down the investment loan, then this is just refinancing debt – so should be deductible, but his net result is the same. If any of the excess funds are used on the PPOR loan then the purpose is private and the interest on this portion won't be deductible.
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
AB59 wrote:If you have debt levels against your IP of $295,000.00 with the Market Values of the IP of $535,000.00 @ 80% the banks would lend $428,000.00 aginst these properties. This would give you an additional $133,000.00 to borrow against your IP's which from my calculations should be able to pay off your PPOR (This is taking into account your offset amount of $109,000.00)
If he borrows to pay off his PPOR loan the interest on this money will not be deductible as the use is private.
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
Jadlak
What you could do is to set up a separate LOC. Use any property that has equity, it doesn't matter which.
You then use this LOC to pay for all investment expenses. ie you borrow to pay expenses such as rates, insurance, water etc etc. This will free up your cash to pay into your offset account on your PPOR. It may free up a few thousand per year. Not much, but it all helps. you then pay the interest on the LOC each month – but don't pay it down. Net result is the same interest in total, but increasing tax deductions.
Taking it a bit further, you could borrow a bit from the LOC to fund the interest on your investment loans if you have a shortall. This will free up more money.
Then further still you can start to capitalise the interest on the LOC so that you can divert more funds to your offset.
And, even further, you can put all rent in your offset and use the LOC to pay the investment loans in full.
These are dangerous strategies and you need to work them out with a good tax advisor or you could get caught out by the ATO. But it is possible to do. Capitalising interest is allowable and borrowing to pay business expenses is allowable – even if you have enough cash to pay for them. You just need to avoid the ATO classing it as a 'scheme'.
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:What is the purpose the funds were used for? If the husband lend the wife money to pay down the investment loan, then this is just refinancing debt – so should be deductible, but his net result is the same. If any of the excess funds are used on the PPOR loan then the purpose is private and the interest on this portion won't be deductible.Thankyou all for your helpful posts so far – I’m absorbing as much as I can.
Ok, I understand that I cannot pay down my PPOR from refinancing my IP’s. But paying down my wife’s investment property (via dropping money in an offset?) sounds like a good strategy.
Terry – I really like your suggestion about using LOC’s for everything. But it sounds very scary! However what it does do is allow me to rapidly pay off my PPOR reducing my ‘bad’ debt by swapping it for ‘good’ debt. So it might be a neat idea in the short term. Perhaps something to discuss with an accountant.
I’d still like to get LOC’s for the 20% deposits during a refinance. Perhaps I can use the extra funds gained from that process for my PPOR? I.E. 20% LOC pays for deposit and that deposit money that I recover (which was my hard earned cash in the first place after all…) I can use for my offset on my PPOR. Hrmm… sounds a little shakey.
Nothing to stop you purchasing the wifes IP and she purchasing yours for market value.
Alternatively both sell them into a Unit Trust.
You would borrow 100% plus stamp duty on the value of the IP's and use the net residual amount to pay down your PPOR.
Then take it upto an 80% LVR by utilising an LOC and use this to funds the future deposits.
This way interest on 100% of the funds raised is Tax deductible and you have achieved your ultimate goal.
If you intend to retain the properties long term then the numbers may well be worth it.
Of course CGT considerations come into play but if the figures work out then well worth it.
Had dozens of clients do just this.
Richard Taylor | Australia's leading private lender
Hi Richard, thanks for joining in
So if I sell to a Unit Trust or a Discretionary Trust (cause I was thinking that might be step 2 as I have 2 kids and a stay at home wife) then I get slugged for capital gains? Ouch… surely that’s gonna be more hassle than it is worth. And I thought if I bought hers, and she mine… again capital gains.
The trust idea sounds better though – because I think it makes us more flexible if/when my wife returns to work in the future, or if our employment status changes. Still I hate the thought of handing over money to the government when I’m technically not selling it! just swapping it about in my family and/or trust.
Remember CGT is only payable on an actual capital gain.
If you purchased it for $300K and due to the market conditions it is only worth $300K then there is no capital gain.
Richard Taylor | Australia's leading private lender
Both properties have risen something like $100k since we bought them.
Well simple answer is Yes you would get slugged with CGT using the concessionary rate.
Richard Taylor | Australia's leading private lender
Terryw wrote:JadlakWhat you could do is to set up a separate LOC. Use any property that has equity, it doesn't matter which.
You then use this LOC to pay for all investment expenses. ie you borrow to pay expenses such as rates, insurance, water etc etc. This will free up your cash to pay into your offset account on your PPOR. It may free up a few thousand per year. Not much, but it all helps. you then pay the interest on the LOC each month – but don't pay it down. Net result is the same interest in total, but increasing tax deductions.
Taking it a bit further, you could borrow a bit from the LOC to fund the interest on your investment loans if you have a shortall. This will free up more money.
Then further still you can start to capitalise the interest on the LOC so that you can divert more funds to your offset.
And, even further, you can put all rent in your offset and use the LOC to pay the investment loans in full.
These are dangerous strategies and you need to work them out with a good tax advisor or you could get caught out by the ATO. But it is possible to do. Capitalising interest is allowable and borrowing to pay business expenses is allowable – even if you have enough cash to pay for them. You just need to avoid the ATO classing it as a 'scheme'.
Terry, that is an excellent reply….thank you very much.
Its exactly what i do……i use my LOC to pay for the repayments of my Investment loans, rather than my own cash
Are banks still giving out discount of more than .70% for new customers. Who are refinancing from another Lender?
Not the days of 0.7% + have almost been (unless the loan is $1M ++) and gone and in fact most arent offering 0.7% unless the loan is over $700-$750K.
Of course it all depends on what 0.7% off.
If the lenders SVR is 0.2% higher than its competitors then i would rather have 0.55% off a lower benchmark rate.
Some of the non bank lenders have a variable rate comparible with the 0.7% discounts anyway.
Richard Taylor | Australia's leading private lender
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