Hi,
My wife and I have only our PPOR which we plow all our savings into in order to reduce our interest. Initially (before knowing better) we made extra repayments into the homeloan but now we simply place additional funds into our mortgage offset account. The problem is we have been redrawing on and off for a while on the home loan to the tune of about $92K over the years. The last transaction was $55K simply to remove all additional repayments and have that cash sitting in the offset account.
I thought this last transaction was a way to ensure that any future use of the money would allow interest deductions but now I’m not so sure. I can’t see how I will prove that the money was used to invest (which it hasn’t been yet). Not to mention the other $37K which happened gradually.
I have about $125K in the offset account now – is it simplest just to throw $92K back into the homeloan and then redraw one lumpsum when I am ready to invest? Any other advice?
Appreciate any help – we are looking to move out and turn our PPOR into investment as well as investing in more property so I am worried I won’t be able to claim interest deductions on that $92K portion now. I don’t have an accountant (yet – I’m shopping) so not sure how quickly I need to act to rectify this
Thanks
This is why always go IO+offset.
You have effectively contaminated the loan, which will make it difficult to claim deductions against in the future if your circumstances change.
You need to simplify the structure.
One of the guys here will know more, but perhaps refinance with an IO+offset, and put all that cash into the offset. If you convert to IP, then move the funds to the offset of your PPOR.
Withdrawing the money to invest is not a problem as it will be for investment purposes. It doesn't matter whether it comes from the redraw or offset.
Where you come unstuck is when you turn your PPOR into an investment.If you want to buy a new PPOR and pull the money from the existing PPOR it could get sticky.
Speak to a property savvy accountant. ASk how many properties they own, what their experience is, etc. Some can do basic stuff but have NO idea when it comes to the small details.
Where are you located? someone may be able to recommend someone. I'm in Sydney and LOVE my accountant. He gets me heaps more than my last guy.
jaiterry wrote:Hi, My wife and I have only our PPOR which we plow all our savings into in order to reduce our interest. Initially (before knowing better) we made extra repayments into the homeloan but now we simply place additional funds into our mortgage offset account. The problem is we have been redrawing on and off for a while on the home loan to the tune of about $92K over the years. The last transaction was $55K simply to remove all additional repayments and have that cash sitting in the offset account. I thought this last transaction was a way to ensure that any future use of the money would allow interest deductions but now I'm not so sure. I can't see how I will prove that the money was used to invest (which it hasn't been yet). Not to mention the other $37K which happened gradually. I have about $125K in the offset account now – is it simplest just to throw $92K back into the homeloan and then redraw one lumpsum when I am ready to invest? Any other advice? Appreciate any help – we are looking to move out and turn our PPOR into investment as well as investing in more property so I am worried I won't be able to claim interest deductions on that $92K portion now. I don't have an accountant (yet – I'm shopping) so not sure how quickly I need to act to rectify this ThanksIf this house will never be rented then it won't be a problem. If it will be rented it could be worse than you think as a very large portion of the loan woudn't be deductible.
For further investments you should not redraw from the loan – as then you will have a mxied loan. You should set up an entirely new split.
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
Thanks all!
Sounds like I’ve badly contaminated the loan unfortunately – but as Paullie suggests I might refinance. Since we will be turning it into an IP and renting it out I will be looking to switch to Interest Only anyway (currently P&I) so this seems logical. Please let me know if anyone thinks this won’t work.
Catalyst – definitely interested in the details of your accountant if he/she has real estate experience and you are happy with them. I’m in Sydney.
Refinancing won't change things if it is contaminated. but you will be able to separate the portions and claim interest on what is left of the claimable portion.
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
So the current value of my loan is $325K – if I refinance to a new $325K loan I can’t claim a deductions of all the interest on this loan? I would keep the already redrawn/saved cash separate (as it is now).
What I was afraid of is that I’ve paid this loan down in the past to $274K and that would be the only amount of the loan I could claim interest deductions on (which is what I had read)
It would likely that the deductibel part of the loan would be much less than $274,000 – even if this was the lowest balance.
This is demonstrated by a quick eg:
$300,000 loan starting balance.
pay down $1,000 per month PI
Interest $500 each monthMonth 1
balance is $299,500Month 2 $299,000
etc
Then after 10 months balance is $295,000.
If you then pay the loan down to $274,000 and then realise your mistake – you may increase teh loan to $295,000 again.
But of this $295,000 you could only attribute $274,000 of it to the purchase of that property. The extra $21,000 redrawn is a new loan. The deductibility of this would depend on the use of this money.
Now you have a mixed purpose loan.
$21,000 used for other expenses
$274,000 used for the purchase of that property
$295,000 in totalThis means that
21,000 / 295,000 = 7.1% other
92.9% for the home portion—
Now it gets more complicated
Each subsequent repayment must come off the loan and be attributed to each portion in accordance with the percentage of the portions.
So each month you pay $1000
7% must come off the other portion
93% must come off the house portionInterest of $500 would be added each month and this too must be added to each portion of the loan
7%
93%—
as you can see as time goes on it gets increasingly complex.
The net effect is that a must lower portion of your loan will be attributable to the purchase of the house and so if this house becomes an investment property you will only be able to claim a lower portion then the $274,000 which was the minimum balance before.
Does this make sense?
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
What a nightmare.
Thanks Terryw for taking the time to give me that example,
That does make sense and clearly I’ve oversimplified what a mistake I’ve made. My scenario (lots of little redraws overtime) will be even more complicated than the example above! I’ll have to show an accountant my data and see if it can be salvaged.
Word of advice to everyone if you ever intend to turn your PPOR into an IP
1. Never pay extra off your mortgage – put it in your mortgage offset account
2. If you do have additional funds available for redraw – talk to your accountant before redrawing! One big redraw that you can prove was used to invest should preserve deductibility on the loan but as in my case it will get convoluted real quick!Sometimes it may be necessary to pay down a loan.
eg. imagine you have a $100,000 property with a $90,000 loan. Interest only. You also have an offset account and $50,000 in it.
If you want to purchase an investment property what would you do?
A. If you took the money from the offset then you would be increasing the non deductible interest on your home loan
B. If you take the money from the offset and pay down the PPOR loan and then reborrow it you will save interest. But if you later were to move out of hte PPOR and rent it you would have reduced your deductible debt.
C a solution would be to keep the cash in the offset and to borrow against any equity in the PPOR and use this to invest. But this may not be possible if the property hasn't grown in value.
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
Now there is an interesting proposition… item C.
I have a considerable amount of equity in my home (>50%).
Perhaps there is a solution in there for my scenario.Regards
jaiterryjaiterry wrote:Now there is an interesting proposition… item C. I have a considerable amount of equity in my home (>50%). Perhaps there is a solution in there for my scenario. Regards jaiterryBut what would you be borrowing for? for the purchase of a new PPOR? if so then the interest wouldn't be deductible.
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
Your offset may be contaminated too eg if you invested $55K of the offset money, the ATO would probably not allow a connection with the redraw, but if it did then only 55/125ths of the investment interest would be deductible as the ATO would say you haen't invested borrowings, rather you have invested savings.
In my opinion it would be unlikely that interest would be deductible on any money borrowed and placed into an offset account and then later used for investment.
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 Terryw,
Just to clarify, I am looking to move out of my PPOR and rent myself whilst investing in further property using the 125K I have at my disposal. So in the end I have more cash in my offset account than I have ever redrawn and I intend to use it for investment. Just not sure how to prove that on the books and make my original PPOR (now investment) loan fully deductible for the interest.
Cheers
jaiterryIf you moved out of hte PPOR then the portion of the loan that you could attribute to the money that was used to purchase the PPOR may be deductibe – or the interest on this portion would. Any interest on any money you have ever redrawn from this loan would only be deductible if it was used to invest.
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
Great article in the latest API from Julia Hartmann that covers this exact scenario and it backs up exactly what you’ve said terryw so thank you. She runs through the same apportioning argument you’ve suggested above – anyone wanting to know above redraw should read it.
Interestingly I went to see an “accountant” who was part of a wealth management firm who gave me completely different advice! He said I didn’t have anything to worry about because the property was my PPOR… I’ll be meeting with another accountant next week for which I will PAY for advice this time.
I am in a much worse situation.
My PPOR homeloan only has redraw facility but no offset account.
I made extra payment to make the balance 0.
If I turned my PPOR into IP, tax deductibility will be 0BankWest told me that I have too much equity (600k x 80% = 480k) and I can only afford to have only one more IP with their loan.
You can never have too much equity!!
If you have a house fully paid off then you are in a really good position. If you have an average income then you should be able to go far.
Slow but sure. Make sure you set up your strategy and structure yourself to maximise benefits.
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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