All Topics / Legal & Accounting / Contaminated deposit for 80% loan

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  • Profile photo of aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    Hi

    I have 2 IPs all with 80% loan. Any equity loan I draw from these IPs for my PPOR will not be tax deductable. Hence, it seems always a good idea to have 100% loan (if you can) for purchasing IPs to max tax deductibility and use funds for PPOR.

    The only to overcome this case I can see is to setup a debt recycling structure on the PPOR. Am I on the right track? However I do not see this is as effective as using 100% loan as debt recycling takes time to build up. Hence paying LMI seems much worthy from a tax point of view.

    • This topic was modified 9 years, 11 months ago by Profile photo of aque aque.
    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Aque,

    Any equity loan I draw from these IPs for my PPOR will be tax deductable.

    As I understand it, such a withdrawal would not be deductable. The purpose of the loan determines deductability, not the asset which the loan is drawn against.

    Your following comments indicate that you KNOW that, so I think your first (quoted) statement was simply missing the word “NOT”. I agree that having higher leverage against an IP makes sense in most cases.

    Re your second paragraph, I’m not sure that debt recycling is the only way – but I agree it might have worked better by paying LMI when borrowing for an IP. As always your “numbers” need to be considered – each situation is different, based on your pay, any savings, your working situation, age, risk profile, goals, etc.

    Is buying a PPOR your next priority, or are you talking of paying down the debt on an existing PPOR? Depending on the situation, perhaps a drawdown on the two existing IPs can provide deposit/costs on your third, thus increasing your income for “debt recycling” on your PPOR loan.

    Lots of ways to cut it, and I’m sure some of our resident finance gurus will be able to add more, especially in a one-on-one with you where you share a lot more detail.

    Benny

    PS Tell us more about the title – “Contaminated deposit” – how is this so? I hope you are not cross-colled with your PPOR…..

    • This reply was modified 9 years, 11 months ago by Profile photo of Benny Benny.
    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Benny’s right – the word “NOT” is missing.

    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 aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    Thanks guys. I have corrected. I am wondering if there are better ways than debt recycling to overcome this issue?

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

    Yes, you are basically stuck as the loan has been made to purchase the property already. What you could have done is to use 104% in borrowings to keep the cash for the PPOR loan.

    A way to increase borrowings is to sell between spouses – no stamp duty in some states such as VIC.

    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 aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    I thought borrowing 104% is not possible. Or it is possible if I use 20% use a security for the loan without triggering LMI?

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

    I thought borrowing 104% is not possible. Or it is possible if I use 20% use a security for the loan without triggering LMI?

    Of course it is. Borrow 80% from ANZ and 24% from your sister.

    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 aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    For the first 2 seconds I thought your reply was a joke. But then I realised this is a brilliant idea!

    Thanks Terry!

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

    Run it by your acccountant as there are many issues – needs to be a commercial transaction but this may enable you to claim more interest

    $100,000 property
    $80,000 loan 1
    $24,000 loan 2

    Wait 2 years and then refinance loan 2 into loan 1. Free up $24,000 cash to use for the PPOR purchase.

    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 aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    Thanks Terry. But now I am lost how is it possible to refinance loan into loan 1?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Aque,
    It would be helpful to understand a bit more of your situation before we attempt to show you “another way”. Would you add more info re these questions?

    Is buying a PPOR your next priority, or are you talking of paying down the debt on an existing PPOR?

    PS Tell us more about the title – “Contaminated deposit” – how is this so? I hope you are not cross-colled with your PPOR…..

    See, while we are not sure just what you are trying to achieve, our ideas can only be general in nature. Help us to help you by spelling out just what your situation is right now, and what you wish to achieve.

    Benny

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

    $100,000 property
    $80,000 loan 1
    $24,000 loan 2

    Wait 2 years and then refinance loan 2 into loan 1. Free up $24,000 cash to use for the PPOR purchase.


    IN 2 years the property may be worth $140,000. (maybe be a bit longer)
    80% x $140,000 = $112,000 = enough equity

    So you just increase loan 1 to $104,000 and use the $24,000 released to pay out the sister.

    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 aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    Hi Benny and Terry

    My goal is to buy a PPOR and aim at a strategy I can have all my saving in PPOR and all IPs at 100% loan for max tax deductibility.

    I think the method Terry outlined is very powerful and it is even more powerful when combined with debt recycling.

    Thanks a lot

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Aque,

    My goal is to buy a PPOR and aim at a strategy I can have all my saving in PPOR

    I’d suggest you add the extra bit at the end that keeps your options open :-

    My goal is to buy a PPOR and aim at a strategy I can have all my saving in an Offset Account against my PPOR loan….

    See, though you might buy a PPOR now, you MIGHT, in later years, want to turn it into another IP. By using an Offset account, your savings offset the mortgage payments as you save. But, when you withdraw YOUR cash from the Offset account, the original loan is still in place (allowing you to claim the Interest on the full mortgage as a Tax deduction on what might be your new IP – your old PPOR).

    Talk about this in depth with the right adviser, or read on here all about it. Be sure to know of this choice before buying your PPOR. One link that helps to answer a lot of early investing questions, including re Offset accounts, is this one :-
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/

    Thanks for adding that extra information re your circumstances,

    Benny

    Profile photo of aqueaque
    Participant
    @aque
    Join Date: 2010
    Post Count: 21

    Hi Benny

    Thanks for your feedback!

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