I got the property bug about 2 years ago, went property mad (and still am) and now have 5 IPs spread across the land.
Each one has it's own stand alone 80% interest only loan. Some are CF+, some neutral, 1 is CF-ve.I also have 1 line-of-credit (LOC) account secured by my PPOR, into which all the various rents get paid, all the various IP costs, rates, insurance etc gets taken from. Also all the 80% interst only loans have their interest paid from this account. All the 20% deposits and purchase costs also come out of this account. In short, it is my working account for all the investment property.
I have never used this LOC for private purposes.
The issue brought up by my accountant is this: against which property does he allocate the interest charged on the LOC? The interest on it is related to all the IPs.
So my question is this: how do other people arrange their day to day IP working accounts? Do they separate them all somehow? How does the very +ve cashflow of 1 help the -ve cashflow of another?
It all works very well but it is very hard to separate each property's performance.
How should I rearrange mine, or is what I do OK?
I have interest only loans on all properties – IP and PPOR.
Have one offset account set up against PPOR.
Get rent paid into offset and expenses paid out of offset. It's essentially the account for all property related income/expenses.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
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Unfortunately when we bought out PPOR we were not as savvy, used P&I and paid it down in 6 years.
We have two IPs each with there own investment account IO only with offset on one. The first is neutral, the second is -ve geared.
I personally like to have separate accounts for them.
Jamie M wrote:I have interest only loans on all properties – IP and PPOR.Have one offset account set up against PPOR.
Get rent paid into offset and expenses paid out of offset. It's essentially the account for all property related income/expenses.
Cheers
Jamie
My PPOR was paid off ages ago, so is there any point in having an offset to a new loan against PPOR? In a sense this is exactly what I have at the moment with the LOC, except it is loan and offset rolled into 1 account.
I don't like your LOC method because you are paying into an investment loan and it will be messy later – like your accountant says. What if you sold one property, how much of the LOC is associated with each property?
I would keep the LOC, but set up an offset account against one of the IP loans. If all IPs are owned by the same entity then it doesn't matter which. Have this as the main transaction account with all rents going in, wages going in, and then all expenses going out.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:I don't like your LOC method because you are paying into an investment loan and it will be messy later – like your accountant says. What if you sold one property, how much of the LOC is associated with each property?I would keep the LOC, but set up an offset account against one of the IP loans. If all IPs are owned by the same entity then it doesn't matter which. Have this as the main transaction account with all rents going in, wages going in, and then all expenses going out.
OK, so what do you then use the LOC for that you keep?
Also why is it messy if I am paying into it? None of it is private use, it is all investment property related-issue is that all the IPs are mixed up.It is messy because how do you distinguish between properties. It could disadvantage you later.
A LOC should only ever be used for investment expenses. ie You can borrow to pay deposits, pay rates, insurances etc.
using an IO loan with offset is much better for getting incomes deposited, including wages and there would be no tax issues when you withdraw funds.
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:It is messy because how do you distinguish between properties. It could disadvantage you later.A LOC should only ever be used for investment expenses. ie You can borrow to pay deposits, pay rates, insurances etc.
using an IO loan with offset is much better for getting incomes deposited, including wages and there would be no tax issues when you withdraw funds.
I don't put wages into my LOC, only rents from the IPs. Wages goes somewhere else.
In regards to disadvantaging me later, do mean in the sense that the ATO may view me as paying some of the LOC off every time I deposit some rent into it and then disallow some of the interest claimed?
So far the most annoying thing with our current use is the mixing of the LOC borrowing for different IPs so that I don't know which IP to allocate the LOC interest against.
But what I hear you saying is that it is ok to use the LOC for all the initial 20% deposits and purchase costs. Then the ongoing costs/incomes go into and out of an offset account against any IP, doesn't matter which because it is saving me interest.
But if an LOC is used in this way, is it not still blurred when the use was for deposits on various properties? FOr example from my LOC I utilise $35k in May, $60k in July and $49k in september all for different properties'purchase costs and I get charged $2500 interest in December. Do I have to be able to allocate or separate that interest into the various properties or is it enough to just say it is all investment related?
(BTW, I really appreciate your help.)
It may not be as bad as I first thought if you are never taking any money out for private use. But it can still disadvantage you. I can think of 2 ways:
1. eg.
Your LOC loan is $300,000 and you are putting in excess cash each week from rents, say $5,000 and your interest is $4,000.
Each week your balance is dropping by $1,000.
After 1 year your LOC balance would be down to $248,000. This is good because you are paying off debt.But if you had used a offset account you could be better off. First, you may receive a 0.1% cheaper rate than a LOC. And secondly your loan balance would still be $300,000 and the offset $52,000. This would result in the same interest (or less considering the cheaper rate), but you would have $50,000 cash available.
If you wanted to buy that ivory back scratcher you always wanted you could take the $50,000 from the offset and in effect claim the interest on it, even though it is a private expense. With a LOC you couldn't.
2. Imagine you have 5 IPs and a mixed LOC – mixed because you used to put rents in and expenses out etc. very hard to track.
You then sell one IP – how much of the surplus money do you need to pay the LOC down by? You cannot continue to keep claiming interest associated with loan to purchase a IP after that IP is sold (usually).
–If you are using a LOC just for deposits then it should be easy to work out the interest for each property – you would need to attribute interest for each property in proportion to the borrowings. Overall it won't make any difference to your overall tax if you get it wrong – but it will when you sell.
But if you are just boworring $39,000 in Jan, and then $61,000 in Feb etc, then in Jan 100% of the interest will be for property A and in Feb 39% for property A and 61% for property B. (roughly – will be different because you need to calculate number of days in month etc).
That is why I think it best to unravel now before it gets messier.
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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