Our PROP will become a rental in the next 3 months. In order to bring it up to rental standards we need to do some work on it – new desk/staircase, hot water system, fence, painting etc. We have converted our loan to LOC in anticipation of the property becoming a rental. I assume it is okay to build up the LOC loan amount ($60K currently excluding the work mentioned above) in order for us to claim the interest once it becomes a rental.
I would think it would be better to use LOC finance for the above in order to free our cash up for any work that is required on what will become our PPOR.How would the ATO view this if we build up the LOC loan to from $60K to say $90K? Would it be a issue or does the "clock start ticking" as far as they are concerned from the day it becomes a rental. I also understand once it is a rental we can add council rates, land tax etc to the LOC in order to build the level of "good" debt and free our cash for the PPOR. Any comments? Thanks in advance.
Hi Gcp
Hate to put a downer on your loan structure but the last thing i would do is utilise a LOC for an investment property.
A simple straight forward interest only loan would be far the best type of loan and surpluis unused funds could be deposited into a 100% offset account.
Interest will be deductible if the funds are used for capital improvements or improvements.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Double posting
I have already posted here
https://www.propertyinvesting.com/forums/property-investing/help-needed/4335239?#comment-227926Terryw | 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
Richard/TerryW,
Would not the interest on a LOC be tax deductable as well if it is a rental?
What would be the differences between a IO loan and a LOC be in this case as far as the ATO is concerned?
It depends how you use it.
If you were to deposit wage in and take it out every week, then you could quickly end up with a large loan and no interest on it being 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
Thanks TerryW,
No intention to deposit wages in the LOC and have not. The LOC loan is only for the rental property to cover on-going expenses solely for that rental property such as on-going maintenance, council rates, potential land tax payments etc. As mentioned the LOC was only set up 6 weeks ago since we plan to move out of this property within the next 3 months in order to rent it.
For what will become our PPOR (new home), I plan to have a P & I loan with offset account – it is here that we will place our wages. They are seperate loans.
Is this a sound loan strategy or should I revisit it before the current PPOR becomes a rental?
Sounds ok, as long as you do not withdraw from the LOC for personal expenses. withdawing(Borrowing really) to pay expenses for this property should be ok, but check with your accountant.
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
The other question I have is does the ATO take interest in what your loan starting amount (and how you got there) is or are they only interested in what happens from the day it becomes a rental?
In other words if I increased my LOC by $20K doing repairs to the house (new deck, painting etc) in the months prior to it becoming a rental property would they scrutinise this potentially?
ATO are interested in what the money is borrowed for.
eg If you took out a $500,000 loan to buy a property in 1980 and then paid it down to $400,000 1 day later and then withdrew $100,000 for a car – the interest on the money used to borrow the car won't be deductible but the interest associated with the house may be if it later becomes a rental.
They do audit and ask about loans and if they have increased etc.
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 Terry but if the loan increased due to expenses directly associated in preparing the property for rent then it should be okay?
The intention of taking out a LOC for the rental was ONLY to cover for direct cost of rental property improvements and any on-going costs such a water rates, council rates etc. I do not want to "contaminate" the LOC with wages going in or car loans etc.
I think that should be ok. If you are going to be using the LOC to pay interest on your investment loan, or let it capitalise then you should seek professional advice – and you should look into this as it can save you thousands.
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
My plan is to let the LOC capitalise slowly over time with the on-going rental property expenses.
I do not quite understand what you mean by "it can save you thousands" – is there a way to maximise the benefit more out of the LOC over and above what I have outlined above?
So you have a loan of $60,000 and just intend to let it capitalise and intend to pay all expenses from this account too? There is no other loan on the property.
It should be ok generally I think, ATO have a ruling out that capitalised interest retains its characters. So if the interest is deductible the capitalised interest should also be deductible. see TD 2008/27
http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200827/NAT/ATO/00001But you have to be careful as the ATO can consider this a scheme with a dominant purposes to save tax and they could apply part IVA of the ITAA and deny deductibility. So don't do this on your own, but see tax advice.
See this Private Binding Ruling where a similar, (but different) scheme was denied:
PBR 1011345133229 http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/1011345133229.htmwhile I am at it see these other ones where it was accepted:
Capitalising interest on a LOC PBR 93707 http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93707.htm
Capitalising interest PBR 94313 http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/94313.htm
Capitalising interest on a LOC PBR 93035 http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/93035.htmTerryw | 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
Sorry to come late into the peace but still in the UK and been skiing for a few days without email access.
Only thing i would suggest is that your own PPOR loan be IO rather than P & I unless you believe you are going to live in the property for ever and a day and never want to rent it out.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
You must be logged in to reply to this topic. If you don't have an account, you can register here.
