Tax Deductible on IP

Hi,

The interest on the loan is a tax deduction. So if you spent $5000 a year on interest in a FY, then that is what you can claim. Principle payments aren’t deductible, so if you have a $50000 deposit in cash, and just spend it, then there is no deductions there since you don’t pay interest. Some of the brokers here can talk about how to setup a loan to get 100%+ deductions for interest, I suspect something like a LOC using a term deposit of the $50k or something is an option… but I’m not a broker!

Personally I would pay LMI, because in the time it would take to save another 10% deposit, the property would have gone up in value more than any LMI savings. But this is an individual choice, and might not work for everyone.

I’m sure some of the more knowledgeable users will post.

• This reply was modified 10 years, 8 months ago by  TheNewGuy.

Hi Glen

Yes you’re getting the idea with regards to the interest being a tax deduction.  Other deductibles include bank fees, or any “annual package fees relating to the loan”.

Remember that as time goes by, and you’re increasing the rent and stockpiling money in the offset account, the amount of interest you get charged will likely lessen each year, thus pushing your property closer to or into the cashflow positive terrain.  For instance, perhaps after collecting the rent, and then paying the bill and the mortgage interest, there might be say $5,000 money surplus that year.  That $5,000 gets added to your day job salary to determine your income tax bracket.  If you’re in the 47% tax bracket, you’ll have to pay 47% of your $5,000 surplus to the taxman.  For this reason, during the accumulation stage, some folks would consider this the time to collect another property, thus cancelling out the gains on IP #1 with the losses on IP #2.

• This reply was modified 10 years, 8 months ago by  Jacqui Middleton.

glengary wrote:

Good Evening everyone, wanted to ask if I buy my 1st property for $500,000 and I put a 10% deposit $50,000 to purchase the property and borrow the rest $450,000 on interest only loan, can I claim back the principal amount of $450,000 as tax deductible? 1. How does that work, do I get to claim that back every year? 2. How much would I get to claim back on $450,000 (my current income is very low only 30k) If this is tax deductible would it even be better long term to not pay 20% deposit for lenders mortgage insurance because with 10% you will be able to claim back more on your tax deductible? Sorry everyone if this question doesn’t relate to investing, I just read an article about this on the train home today and interested me.

Why not borrow the full amount plus stamp duty – say another 80k. Paying cash could mean you are missing out on an exxtra deduction of $80k x 5% =$4000 per year for 30 plus years..

Hi Vinh

Usually when you have sufficient equity in other property.

Cheers

Jamie

Vinh wrote:

Lenders will lend you 100% plus purchasing costs? At what stage of the accumulation of properties would this be suitable?

There are strategies to increase deductions. Since this is an investment property if you put down $50k of cash and then in a few years you buy a PPOR then that is $50k less cash you will have and therefore 5% x $50 = $2500 less tax deductions each year. Over a 30 year period this amounts to a huge amount – think of if you saved $1000 in tax per year and paid another $1000 off the non – deductible home loan.

You may be able to borrow this $50k from a relative and then refinance this loan in say 2 years by increasing the loan with the bank.