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Def convert to IO + offset or you will end up paying more tax later.
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, am interested to know why you recommend this. I am in a similar situation as Amit but didn't want to go interest only due to the lower value (and so slower $ growth) of a small property.
Thx
If you pay PI you are tying up your cash in an investment property. If you later want to use the cash you will be stuck.
eg your loan is $100,000 and you pay it down to $90,000. Later you want to buy a $10,000 personal item. You need to reborrow the money but the interest on the $10,000 won’t be deductible.
If you had used a $100,000 loan with a 100% offset account you would have only paid interest on $90,000 while the $10,000 was in the offset. When it is removed your interest is on the full $100,000 and it is still fully deductible. This will essentially allow you to claim the interest on the $10,000 for the personal item as a tax deduction.
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:If you pay PI you are tying up your cash in an investment property. If you later want to use the cash you will be stuck. eg your loan is $100,000 and you pay it down to $90,000. Later you want to buy a $10,000 personal item. You need to reborrow the money but the interest on the $10,000 won't be deductible. If you had used a $100,000 loan with a 100% offset account you would have only paid interest on $90,000 while the $10,000 was in the offset. When it is removed your interest is on the full $100,000 and it is still fully deductible. This will essentially allow you to claim the interest on the $10,000 for the personal item as a tax deduction.Do you mean that if it is PI + IO the offset account would be considered as already paid?
techamitdev wrote:Terryw wrote:Def convert to IO + offset or you will end up paying more tax later.Thank you for the reply.
After deducting all payments, as of current % rate, I will be going in to positive gearing with this property. Do you still it is a good idea to have IO only?
I am preparing to buy another one though so it might be the good idea to pay only IO but in that case I will have around 400-450 per month earning (+ve gearing) and I will end up paying TAX on that too. but If I will have IO + Princ. then it will be around 100-200 $ per month positive earning.
In both case I think I will have to pay tax on earning but the difference will be is if I will have IO then I will have more funds but that can be chewed by -ve gearing property that I will buy this year.
what is your recommendation now?
Btw, I'might move back to this apartment – still should I make it as IO?
Yes, all loans should be IO. Never use PI unless you are a spendsthrift and cannot control yourself.
It won't matter at tax time whether you use IP or PI as the princple of a loan is not deductible. If you use a 100% offset the interest will be the same anyway, but it will save you tax down the track.
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
techamitdev wrote:Hello Terry,Thank you for your time.
Just a last question.
Even if I am going to +ve gearing, should I still maintain this as as Interest Only (IO) loan?
Best,
AmitYes. otherwise you will be tying up your cash and won't be able to use it without tax consequences.
eg what would happen if you paid your loan down by $50,000 and then needed $50,000 to buy a personal item (such as an ivory back scratcher)? You would need to reborrow the money from the bank, but couldn't claim the interest on the $50,000 redrawn. Whereas if you had used an IO loan with a 100% offset account you would have saved the same interest, but still have the cash available without the tax consequences.
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
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