Hi all,
great site! I have just purchased a property to move into and would like to keep the current apartment we are in as an investment property. The bank said they can refinance and do a split loan but I've been reading that the ATO doesn't like this kind of setup.
Current situation is:
Apartment loan owing = 210,000
New house = 670,000
Total Owing = 880,000Apartment is valued at = 400,000
80% of equity gives 856,000 new loan to refinance plus we top up the rest from savings.
I would like to use the apartment as an investment and was suggested that I split the loan so that
New Loans
apartment = 400,000 (interest only)
house = 440,000 (principal + interest)Is this possible and are you allowed to use the interest incurred on the apartment as a tax deduction?
I'm so confused!
thanks in advance
You can split the loans as you wish, but if you want to deduct the interest you should do so in a tax effective manner.
Your current loan is $210,000. If you move out and rent this apartment then the interest on this should be deductible.
But if you increase this loan to $400,000 you have to look at what use the extra $190,000 is put. It seems you will be borrowing more to buy a private residence, so the interest on this extra $190,000 likely would not be deductible.Having a combined loan like this would disadvantage you.
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
A late addition to the thread
Thought Id add here for other readers looking into this topic- (im sure its elsewhere on the site)
It shows the importance of using a Redraw facility for IP's instead of paying the principle directly.
The many people that I talk to with just 1 or 2 IP's dont understand that when it comes time to borrow for another property (IP or PPOR) the interest isnt deductable against the initial IP..
A big trap for the taxman to hang you on..
Keep up the great work everyone!
Darcy
Mr D
I think you should clarify a bit. What do you mean exactly?
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
Hi Terry
Im not a finance guru so its just a FYI Comment for other readers to keep in mind but ill try and clear it up..
If I pay my principle & interest off like the banks make mum and dad investor believe is the best thing to do, then I have equity to release in a few years time by either borrowing with a new loan.. etc
The problem is that all the $$ paid off the property when "redrawn" arent tax deductible against that property even if they own it outright, only the portion of the $$ used as a new investment is deductible (for a new IP deposit etc)
What I believe to be the case (someone please correct me if im wrong) is that if you pay into a redraw facility/offset account (offset your interest on the IP and reduce the loan at the same rate etc) The $$ that you redraw are then deductible as per the initial IP purchase/total loan amount..
Its just something I think is worth considering when people arent highly leveraged and are able to pay down debt..
Hence its no good to me at this stage as its IO all the way.. im just setting it up for future strategy to buy PPOR outright..
Let me know if there is anything in particular and ill do my best..
Cheers
I think you are equating a redraw facility with an offset account. These are totally separate and different products and care needs to be taken when deciding which one to use.
Assume that someone has a home and pays down the principle a fair bit.
If they also have money in an offset and then decided to use that money as deposit for an investment property then they would be disadvantaging themselves. This is because the interest on the home loan would increase when they take money out of an offset. The extra interest incurred wouldn't be deductible as it is interest in relation to the loan used to acquire the main residence.
Now if they used redraw the situation would be different. If they used redraw they would be borrowing money. Taking money from a redraw equates to a new loan. The interest on this new loan would generally be deductible if they used the money for the deposit on an investment property.
So by just knowing this little bit they have saved themselves possibly thousands in tax every year.
But, ideally they shouldn't use redraw as the loan would be then one big loan with part of it used for the investment and part used for the main residence purchase. Each subsequent repaying into this loan would have to come off the investment portion as well as the non-deductible portion. That means they would be paying down their investment loan before they have paid off their non-deductible loan. This means they are losing tax.
A better way would be to set up a new loan split, IO of course, secured against their home. They can then keep the investment and private portions separate and then save more tax.
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
Point taken.
I agree if the initial loan is PPOR it is a negative, KYZER is now using old PPOR as IP so I was reffering to this.
If they had it set up initially, is the new portion/redraw deductible against IP? lowering the loan on the PPOR upfront? paying down PPOR quicker?
You are right about the naming of the products (most banks call them different things? and I cant keep up)I think overall the point has been made to look at it further if it suits the situation ..
And also agree – care always needs to be taken!
Sorry it took a while to get there!
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