All Topics / Help Needed! / Tax Deductible on IP

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  • Profile photo of glengaryglengary
    Participant
    @jamesbi
    Join Date: 2014
    Post Count: 45

    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.

    Profile photo of TheNewGuyTheNewGuy
    Participant
    @thenewguy
    Join Date: 2014
    Post Count: 151

    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, 7 months ago by Profile photo of TheNewGuy TheNewGuy.
    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Hi,

    To answer your questions:

    1. How does that work, do I get to claim that back every year?

    As has been mentioned, it is the interest on the loan, rather than the loan itself, that is tax deductible. Principal repayments are not tax deductions.

    2. How much would I get to claim back on $450,000 (my current income is very low only 30k)

    None of the $450k is tax deductible as mentioned above.

    On a sidebar issue, be careful not to have tax issues (ie. the tail) wag the property dog.

    Your investment should meet your strategic needs in respect to delivering your desired profit outcome first and foremost (within your parameters for time, money, skill and risk tolerance). Tax is important, but it is not the prime investment consideration.

    I’m not sure if LMI is tax deductible, or whether it has to be added to the cost base or amortised as a borrowing cost over five years. I suspect it can be amortised, but you should get a tax opinion on it.

    Regards,

    – Steve

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of glengaryglengary
    Participant
    @jamesbi
    Join Date: 2014
    Post Count: 45

    Wow Steve Mc knight replied back to me, I feel honored, I just read your book recently which brought me to your forum awesome.

    Oh ok I understand steve, so it is the interest on loan that is deductible. So for example if I wanted to buy an IP as my first purchase for $500,000 10% deposit with offset interest only structure. Live there for a few years, I could pay off interest on loan and put all my spare savings in offset account for my next property and than rent this one out. I would be able to claim back interest on loan of the $450,000 ?

    so for example if I borrowed 450,000 at a 5.88% paying monthly $2205 x 12 = $26420 I could claim against this amount ? this is awesome Steve I feel privileged to have a comment replied by you , didn’t expect this

    Thanks Glen

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    As far as LMI is concerned it is deductible over 5 years or the term of the loan whichever is the lesser although in Year 1 it is claimed proportional to the number of days the asset is held in that Tax Year.

    Glen if you intend to rent the property out you maybe better off to borrow 100% and utilise your cash savings as collateral security.

    That way when you move out you can claim 100% of the interest on the property.

    Cheers

     

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    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.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    JacM raises a good point, I find a lot of clients try to balance out their property portfolio to be neutral overall during the accumulation phase, as they can make good use of the positive cash flow on their other investments by putting it to use with new investments. When the portfolio reaches critical mass they can sit back and let the cash flow rise each year, develop or even sell down after capital appreciation.

    A nice situation to be in any case. :)

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

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

    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..

    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 VinhVinh
    Participant
    @vinhle
    Join Date: 2014
    Post Count: 2

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

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

    Hi Vinh

    Usually when you have sufficient equity in other property.

    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 superAndrewsuperAndrew
    Participant
    @superandrew
    Join Date: 2014
    Post Count: 188

    Assuming you make 30k per year and have $50,000 cash and no other assets or partner that also has a salary.

    2. How much would I get to claim back on $450,000 (my current income is very low only 30k)

    Is it really a good idea to maximize your interest deduction when GLEN is only making 30k  and paying roughly $2,300 in tax per year. Borrowing 500k (100%) at 6% will cost you $30,000 in interest alone. That’s all your salary. At your current income level I would recommend borrowing no more than 200k.

    Oh ok I understand steve, so it is the interest on loan that is deductible. So for example if I wanted to buy an IP as my first purchase for $500,000 10% deposit with offset interest only structure. Live there for a few years,

    If you live in your IP, it is not regarded as an IP and you can’t claim the interest as a deduction.

    superAndrew | Property Analyser and Finder Tool
    https://property-analyser.com.au

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

    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.

    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

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