LOC to pay IP loan interest

Hi Terry,

Do you just mean that the LOC is used exclusively for investment and is not being diluted by nondeductible reborrowing?

Andrew

Thanks Terry.  Interesting point.  I'd be thinking more about my cashflow than a tax reduction scheme (although it is good to pay less tax if you can).  How routine (and expensive) are private rulings?  I'd never heard of them before I came to this site.

Andrew

I haven't seen the private ruling, so not sure why it was rejected but think it was due to the LOC being secured against the same home as the main loan. So this made it look too much like the scheme in the Harts case.

I would still recomend trying to set up a debt recyling strategy – just do it property so that it is not a scheme. Best to pay for some advice to be safe.

You are not really relying on captal growth on the IP – unless you only have limited euqity I guess. Overall your loan levels should remain the same. You non deductible debt will be reducing at the same rate as the deductible is increasing.

There is nothing wrong with putting wages and rents into an offset account. This is what you should be doing, otherwise you will end up with a mess. The question is should you be borrowing from the LOC to pay the interest on the investment loans and should you bepaying the interest on the LOC or letting it capitalise?

Hi Jacqui & Cheersy

This strategy can be a very good one, however Terry’s advice is spot-on…you need to seek professional advice.
Some general comments include:
* you need to ensure your primary purpose is NOT to gain a tax advantage
* the interest will only be deductible if the original interest is deductible
* you require 3 loans: Home Loan, Rental Property Loan and Line Of Credit (LOC)
* rental property loan should be interest only
* interest and all other costs are paid from the LOC
* all rental income to be paid into the home loan
* loans must not be linked, ie they must be separate accounts
* beware of financial institutions offering these types of loan products – could compromise the dominant purpose
* nexus is critical (eg don’t use LOC for other purposes)

This is an intricate area of property investing and needs to be set-up correctly. SEEK PROFESSIONAL ADVICE!!

Trust this helps.

Garry

You’re welcome cheersy. Hopefully you know a good accountant…let me know if don’t. Good luck!

Hi Garry,

When you say must not be linked do you mean they have to be separate loan facilities or not crossed collaterised?

Eg. I have homeloan with LOC both with the same security but have IO investment loan another bank? Would that be suitable if I applied for a ruling?

Can the wages/rent just credit the home loan offset account and not get directly paid onto the loan? Or would the ATO not like that as you are technically not reducing the principal only saving on interest?

Thanks,

Jacqui

Hi niffnuff
I do know a few accountants on the Gold Coast, however I’m not confident in terms of their experience/knowledge. The organisation I would suggest is Chan & Naylor in Fortitude Valley Phone 07 3252 8777. I’ve had dealings with them in Sydney and they are very professional.

Cheers
Garry

niffnuff

Pesonally i wouldnt have any dramas with Chan & Naylor but would certainly get a quote from them before you give them the green light.

For an Accountant on the Gold Coast feel free to contact my Accountant who is an expert on property structures and based in Southport.

His name is Steve Hodgkinson and he is a partner at the Gold Business Group.
Contact number is 07 5532 2855.

Steve is a forum member and has helped hundreds of my forum clients.

Tell him i sent you as most good property accountants are not taking on new clients especially this time of year.