A question I don't know the answer to…
Someone borrows 100% against an investment property – 80% standalone and 20% through another Investment Line of Credit.
- If the property is sold can you payout the 80% however direct the cash proceeds from the sale towards personal debt – as opposed to paying it into the Line of Credit (source of the 20%)?
- If you use the cash to buy a new PPOR is the 20% that forms part of the original Line of Credit still deductable – now that the associated investment is sold?
Follow on from this
- If you have an unencumbered PPOR and you borrow 500k against it via an investment loan to buy shares. Then a year later sell 250k of shares – can you take you cash and use it to buy another PPOR and keep the 500k as an investment loan?
- Is this a method of swinging equity back to a desired property?
I'm sure bankers and brokers don't think of this when their customers are selling property – e.g. tax ramifications if funds from the sale of an asset do not get directed back to the original source of funding. If the loans have been refinanced it would be almost impossible to account for.
Any thoughts or feedback?
While the answer is a little more in length and I suggest you take the time to sit down with someone on the matter, the ATO typically holds that funds that are used for a particular purpose, without thought of where the funds actually came from, are linked. Ie, if you borrow money to buy an asset, then those borrowings are linked to that asset. Does not matter if you use a property loan, personal loan or credit card – if the asset is sold, the debt is deemed to be extinguished from a tax point of view.
So, funds borrowed from your PPOR for shares are linked to those shares. If you sell those shares down, some funds should be paid back off the corresponding loan. It's gets a bit more difficult when taking capita gains into consideration, however rule of thumb is to use the cost base of the asset.
Hope this doesn't dissapoint, it's always nice to think you've got one over the tax office. There are, however, other ways that you can use your debt and asset structure to reduce non-deductible debt very quickly, but that's a very different topic.
Cheers,FinSpec.
I’ve got a recent transaction. There were 3 investment properties all with original debts of 80% LVR. All seperate loans.
The market had increased to a point where 2 of the investment loans were increased to pay out the third – leaving one title unencumberred. The unencumberred property has now been sold, as no debt was secured against it the plan was to take the cash from the sale and spend it on a new PPOR.
Problem is that some of the other two investment loans are no longer tax deductable – as these loans in part relate to an investment that no longer exists.
As time goes on – and these transactions fall further in to the past, they clean their faces from a tax perspective – many investors with multiple properties only pay out the debt secured by a property when it is sold – without consideration as to which account the original deposit funds were drawn from… E.g. If 20% came from an investment line of credit – that 20% is no longer deductable.
From a forensic tax accounting perspective a lot of investors would be claiming interest that is not deductable because of this – however it is so unrealistic to manage I doubt in many accountants would pay any attention to it.
I’m interested to see if anyone knowingly accounts for this?
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