I wish to by a negatively geared property using the equity in my home. The rental income will not cover the inerest, and as such I will need to make up the difference of about $1000 per month (excluding deductions). Is it possible to add this cost the the amount of the loan? For example, if the property and associated costs come to $500K and the bank allows me to borrow $600K, I will have $100K excess. Can I use this excess to pay any difference between the rental income and the interest? Is this legal? I understand that over time the size of my IP debt will increase, but so will the value of the IP and my residence, and I wouldn't be paying anything out of my own pocket.
Alternatively you could do the same exercise with a major lender at a cheap interest rate.
Of course any such strategy requires independant Tax advice and certainly would suggest you look at a Private Tax Ruling.
A good independant mortgage broker can give you a few options in relation to alternative lenders.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
It is possible and it is legal, but the ATO could deny the deductions if they consider it a scheme to avoid tax. So I would suggest a private ruling too.
Also it may be easier to set up your main loan as IO and then a separate loan in the form of a LOC and then borrow from the LOC to pay the interest. Keeps things separate in case the ATO deny deductibility on the capitalised portion and also keeps the banks happier as you are seen to be paying the main loan and not capitalising., You may be able to capitalise the interest on the LOC or just pay the interest on this every month.
You need good tax advice on this.
See this private ruling rejection on something similar:
PBR 1011345133229 http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/1011345133229.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
Thankyou to both of you for your help. I am seeing my accountant next week about this, but it all seems OK so far. I am not doing it to avoid tax, just to hold the IP.
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