All Topics / Finance / Clarification of some negative gearing principles

Viewing 7 posts - 1 through 7 (of 7 total)
  • Profile photo of coashcoash
    Participant
    @coash
    Join Date: 2011
    Post Count: 2

    For investment properties, everyone does IO, with least amount of input per month into this, to maximise tax deductions, with the main aim being that the property will CG more than the interest you owe the bank, and also to save you cash so you can invest elsewhere.

    Is that correct?

    What if you got a large lump sum of $1 mil. Why do you not want to pay off your investment property to make it CF+? OR is the reason you don’t want to do this because you can use the money elsewhere, ie invest in more properties?

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Interest only is favored by investors because the "interest" component of the loan is tax deductible. If they set up the loan as principle and interest, the "principle" they pay on the loan isn't deductible.

    For that reason, if you're looking to pay down any loan, it's best to pay down non-deductible debt first (ie your PPOR loan).

    However, I'd even go one step further and suggest that all loans should be set up as IO (even the PPOR). I wrote an article for API magazine on the subject recently here

    Cheers

    Jamie

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    The main reason is that you should pay off nondeductible debt first – ie home you are living in. If this is paid off you could use IO or PI for investments. using IO could help spread your investments more though.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of NM7NM7
    Participant
    @nm7
    Join Date: 2010
    Post Count: 45

    I’ve been in a similar boat whereby I inherited a decent pool of money from overseas. I used the funds to pay-off my PPOR and the balance was parked in an offset account for an investment property. That way, while I’m planning for my next investment move; I get to lower down the interest I pay on the investment property (after having nil interest paid on nondeductible debt) without paying off the principle amount.

    Cheers’
    NM

    Profile photo of Henry AdamsHenry Adams
    Member
    @henry-adams
    Join Date: 2011
    Post Count: 105

    OK, so by having the IO loan, does that means we also need to refinance it every 5 years for the better deal or just renew it again for another 5 years ?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    IO will usually automatically revert to PI at the end of the IO term.

    You can then, or before, approach the bank and ask them to extend the IO term.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Henry AdamsHenry Adams
    Member
    @henry-adams
    Join Date: 2011
    Post Count: 105

    Ah, no wonder my loan is somehow reverts back to the PI after the end of terms by default.

    Thanks Terry

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