Hi there,
I've a scenario as described below and I would like to get some advise if I can get tax deductions for extra loan that i took or not.
Currently I've existsing PPOR, morgage left on this is $245K and current value of PPOR is $400K, which will allow me to borrow 85% of equity is $95K. This $95K I would like to get from bank as seperate loan ( Not LOC but just normal residential investment loan).
Let's say I got this $95K as residetial investment loan in March 2012, as soon as I got this loan I start to pay interest on that as it is not LOC. ( This $95K is only to be used as deposit and purchasing costs for my investment property)
Now I've started looking for properties and if required I engage buyer's advocate to help me select the right property ( who charges me e.g $10K for their service, I pay the buyer advocate from this $95K loan).
Now
Scenario 1)
after some reasearch and help of buyer's agent i mange to buy investment property in May 2012, and I used rest of the money from $95K loan to pay for deposit and all other costs
Q: Will I be able to claim tax deduction on this $95K loan from March 2012 or from the May 2012 when the property has been bought. (Please note when I draw the $95K loan my intention always was to use this money to buy residential property as investment and all other costs along the way)
Scenario 2)
I am still searching for the property and haven't had luck yet and it is already July 2012.
Q: Will I be able to claim tax on this $95K from Mar 2012 or I can't claim this in tax as I haven't bought the property yet.
thanks a lot for your response in advance.
any better suggetsions on how should i go about structuring the loans will be helpful as well.
Cheers
S0805Why not get a LOC? I dont know if you can just get a normal residentail loan and get the bank t give you the cash. also, when you get the cash, you would need to put this in a seperate account away from your savings otherwise the borrowings may become contaminated and you might lose tax deductablity.
You will pay an extra 0.1% for a LOC but this is only $7.91 per month on a $95k loan, which would surely be cheaper than paying the interest on the $95k loan for 3 or 4 months prior to you buying the property.
Cheers,
LukeHi Luke,
Thanks for your reply. I am not against the LOC, it was just that I was recently briefed by expierenced property investor to follow this stratergy and not to go for LOC ( may be to avoild paying more interest for the life of loan). I also recently read somewhere that demand for LOC is down for the investment purposes as well.
Anyways if the bank agrees to give me that as normal residential loan do you think as per the above scenario, I will be able to claim interest from Mar 2012. I completely agree that money from this $95K loan should not be used for any other reason then investing to avoid any tax complication.
Also, If I use LOC with the similar dates and let's say I pay $10K to buyer's agent ( Mar 2012) from this $95K do you think I can claim the interest on $10K from Mar 2012.
Thanks for your help
S0805As i'm sure you're aware, to claim interest as a tax deduction, the funds must be used for or towards income producing pruposes, be it capital or revenue in nature. Therefore, in your above senario, until the funds are used as such, you will not be able to claim a tax deduction…
I presume from the information you provided, you are having to draw down on the funds when the loan is establised. Otherwise, you wouldnt be paying interest. Therefore, what will you be doing with the funds until they are needed for a property purchase ?'. This will determine the interests tax deductibility.
If you have to draw the funds upon the loans establishment, then repay the funds back in to the $95K loan ( minus a small amount to keep the facility open). Then redraw as required. This eliminates most of the non deductible interest expense !
Paul
Pjevans wrote:As i'm sure you're aware, to claim interest as a tax deduction, the funds must be used for or towards income producing pruposes, be it capital or revenue in nature. Therefore, in your above senario, until the funds are used as such, you will not be able to claim a tax deduction…
I presume from the information you provided, you are having to draw down on the funds when the loan is establised. Otherwise, you wouldnt be paying interest. Therefore, what will you be doing with the funds until they are needed for a property purchase ?'. This will determine the interests tax deductibility.
If you have to draw the funds upon the loans establishment, then repay the funds back in to the $95K loan ( minus a small amount to keep the facility open). Then redraw as required. This eliminates most of the non deductible interest expense !
Paul
Hi Paul,
thanks for your reply. So basically as long as fund is not used for any purchases for investing purposes i can not claim that in tax deduction. Just the motive for the usage of fund is not enough?
To answer you question what will you be doing with the funds until they are needed for a property purchase ? I will be in market looking for properties or hire buyer's advocate to find me property eith their fees. I mean I will be redrawing 95K in Mar 2012 but i will not be spending this money until I make the property purchase ( e.g. in May 2012), the gap between Mar 2012 and May 2012 I'll be in market looking for properties or use the buyer agent's services but until I make property purchase i can not claim interest on this loan. Is that what you mean. Please confirm.
If that is the scenario then there is no difference of using this $95K as LOC or normal loan.
thanks
S0805Hi S0805
If the lender allows, set-up an offset against that $95k interest only loan. When the funds settle – move them into that offset. That way, you're not paying any interest on the funds until you use them.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
s0805 wrote:To answer you question what will you be doing with the funds until they are needed for a property purchase ? I will be in market looking for properties or hire buyer's advocate to find me property eith their fees. I mean I will be redrawing 95K in Mar 2012 but i will not be spending this money until I make the property purchase ( e.g. in May 2012), the gap between Mar 2012 and May 2012 I
S0805Where will you put the money? If you borrow it then you will have to place it somewhere until you use it. This may break the connection between borrowing and investingl
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
The tax act uses the word 'Nexus". There must be sufficient nexus ( or connection) between the use of the funds and earning assessable income, to claim a deduction. Therefore in your case, if you were to use some of the funds to pay for a buyers advocate to find you a property, to maintain that nexus, you would hope to have purchased a property within a reasonable time frame. If too much time has passed between incurring the expense and earning income ( or future capital gains), then the nexus make be broken….
So, lets assume you spend $5K on a advocate ( i have no idea if thats market value), the interest on that $5K may be deductible, taking into account what i just said. However, the interest on the balance would still not be. I would suggest going with what Jamie said above with regards to an offset account…
Good luck with your future purchase
Interest expense would form part of the cost base of a CGT asset, however the cost base is reduced to the extent that the expense is deductible.
Costs of searching for a property do not form part of the cost base of a CGT asset. They are also a capital expense and therefore are not deductible.
The cost of agent fees are specifically mentioned as included in the second element of cost.
However, if no asset is acquired then you do not get to capitalise that cost.
Given that rent is income from property, and that you have not yet even located the property to derive that income, then there is a strong argument that these interest expenses are merely preliminary to an income producing activity.
This will be one argument that the Commissioner will use to distinguish your scenario from Steele's case.
If you choose not to deposit your funds in a 100% offset account against the original loan, and if you choose to claim anything prior to entering into a contract then you had better get some good legal advice.
The cost of competent advice may or may not be deductible, given that it revolves around an issue of capital acquisition.
Cheers,
Rob
First of all, thanks all for your feeback and time for my question.
Jamie M wrote:Hi S0805If the lender allows, set-up an offset against that $95k interest only loan. When the funds settle – move them into that offset. That way, you're not paying any interest on the funds until you use them.
Cheers
Jamie
This is an excellent idea, thanks for that.
Pjevans wrote:The tax act uses the word 'Nexus". There must be sufficient nexus ( or connection) between the use of the funds and earning assessable income, to claim a deduction. Therefore in your case, if you were to use some of the funds to pay for a buyers advocate to find you a property, to maintain that nexus, you would hope to have purchased a property within a reasonable time frame. If too much time has passed between incurring the expense and earning income ( or future capital gains), then the nexus make be broken….Good luck with your future purchase
Hi Paul,
Can you please advise from the ATO perspective is there any number to reasonable time frame as per your update. The expeirenced property investor I've talked to he advised me to draw $95K loan and put it against the offset of my PPOR and claim deduction on this $95K loan while I am looking for property but from your explanation and general feedback from this forum seems like it is incorrect way to go about it.
So basically, If I'll follow what Jamie has advised and use buyer agenct fees ( which is sitting in offset account) from this $95K loan I can claim interest atleast on fee for buyer's agent until i make purchase. Is that right?
thanks
S0805Rob G. wrote:Interest expense would form part of the cost base of a CGT asset, however the cost base is reduced to the extent that the expense is deductible.Costs of searching for a property do not form part of the cost base of a CGT asset. They are also a capital expense and therefore are not deductible.
The cost of agent fees are specifically mentioned as included in the second element of cost.
However, if no asset is acquired then you do not get to capitalise that cost.
Given that rent is income from property, and that you have not yet even located the property to derive that income, then there is a strong argument that these interest expenses are merely preliminary to an income producing activity.
This will be one argument that the Commissioner will use to distinguish your scenario from Steele's case.
If you choose not to deposit your funds in a 100% offset account against the original loan, and if you choose to claim anything prior to entering into a contract then you had better get some good legal advice.
The cost of competent advice may or may not be deductible, given that it revolves around an issue of capital acquisition.
Cheers,
Rob
Hi Rob,
thanks for your reply. Please correct if I am wrong here what you are suggesting is that buyer's advocate fee which will be used from this $95K is considered as cost base of a CGT asset given even if I'll draw $95K and put it against the offset account. My understanding was interest on this $95K I am getting which is only for the investment perspective can be claimed in deduction. As eventually this $95K will cover the deposit, stamp duty, legal fees, regsitration fees & buyer's advocate fees for my investment property purchase.
thanks
S0805My view is that none of the interest will be deductible if you put the money into an offset account. Once it hits the offset it is no longer borrowings. See the Domjan case – although Domjan was denied deductibility because the borrowed funds were mixed with non borrowed funds in the offset.
Use a LOC as it is not worth the risk. Or use a term loan with redraw and have the funds sitting in redraw ready to invest. Make sure this is a separate split though.
As for the interest on the buyer's agent fee. This will relate to a property which you have not yet purchased. So I am not sure how it would be treated. Would be interested to know what the accounants think.
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
This is complicated- I would get actual advice from a suitably qualified and experienced accountant rather than from a forum. Relying on something that someone told you in a forum is not the best idea.
Cheers,
LukeNot meaning to be rude or to judge against forum users- I love this forum and am on it all the time but sometimes you have to get paid advice.
Cheers,
LukeTerryw wrote:My view is that none of the interest will be deductible if you put the money into an offset account. Once it hits the offset it is no longer borrowings. See the Domjan case – although Domjan was denied deductibility because the borrowed funds were mixed with non borrowed funds in the offset.Use a LOC as it is not worth the risk. Or use a term loan with redraw and have the funds sitting in redraw ready to invest. Make sure this is a separate split though.
As for the interest on the buyer's agent fee. This will relate to a property which you have not yet purchased. So I am not sure how it would be treated. Would be interested to know what the accounants think.
I agree with Terry- a LOC doesnt cost any extra (well a bit extra but the difference is nigligable) and is easier to use than a loan split for this purpose so why try to complicate things.
Cheers,
LukeAlthough i agree with Rob that the agents fee is capital in nature and therefore forms part of the cost base of a future purchase, you are not trying to claim the actual fee as a deduction right ?, only the interest expenses on the funds used to pay the expense..Eg – If the agents fee is $5K, then you can claim the interest on the $5K.. I'm pretty sure thats correct. Althought i must admit i've never seen it in practise ! Again, if the funds are used to gain assessable income, then the interest is generally deductible. As mentioned, if you are trying to claim deductions for an assets that is purchased in subsequent years, the nexus begins to fade and i dare say the commissioner would raise that arguement. However, given your circumstances, if you engage the agent in March and purchase before 30 June, i'd be claiming the interest incurred in paying the agents fee..
The advice your agent give you about drawing the $95K out of an investment loan, putting the funds against your personal mortgage and then climing the interest as a deduction is totally WRONG…Ofcourse you can do it and you may not get caught…but its WRONG…Its the use of the funds that determine its deductibility not the source…It may be called an investment loan and one day the funds will be used to purchase a house etc…but until they actually are used in that manner, the interest isn;t deductible !
Good topic !
luke86 wrote:This is complicated- I would get actual advice from a suitably qualified and experienced accountant rather than from a forum. Relying on something that someone told you in a forum is not the best idea.
Cheers,
LukeHi Luke/Terry,
Agree with you guys that using LOC would uncomplicate things in this scenario. And totally agree with Luke to say this is one of the best forum for property investment where ofcourse we don't completely rely on someone's suggestion or advise but nevertheless it opens up opportunity to talk to like minded people and discuss the strategy in open environment…invalaubale.
thanks all for your feedback, i will surely get some advise from accountants on this and will update as soon as I have answer.
S0805Agree Jamie but you never now the 3rd post might actually be a contribution to the forum community rather than a plug for business.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
You do realise that you are going through all this stress worrying about whether you can save $108?
$10,000 X 6.5% X 2 months = $108
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