Hi everyone:
I am currently organising to purchase a property 2. I am at the moment living in property 1 and plan to stay there for next the 12 month and keep property 2 as an investment for 12 months as well. The plan is after 12 month to move into property 2 and live there long term and leave property 1 as IP.
Currently i am facing the question of trying to use my resources in the best way possible. I can have a deposit done into the property 2 from my savings or from the equity in property 1. Would you mind guys to make some comments in relation of what do you think is the best option for tax purposes. In brief my little understanding is that if i use the equity from property 1 for the deposit, i will be able to deduct the interest generated by the use of the equity in property 2 but just for the 12 month (the term this property is going to be generating income). Do you think is ok to use saving in this case and leave the equity in property 1 for future investment. Thanks in advanceHi Manola
Always use equity where you can as it gives you flexibility.
Establish a separate equity loan on your current property and use these funds as deposit on your new property.
Keep the loans separate and not cross collateralised.Place your current savings in an offset account linked to the current PPOR property.
When you move into Property # 2 delink the first offset account and set up a new one linked to this loan.
Get professional assistance to ensure the loans are structured correctly as getting it wrong maybe a expensive mistake in the long run.
Cheers
Yours in Finance
0-40 Properties in a decade. Ask me how.Richard Taylor | Australia's leading private lender
Thanks Richard.
I have seek advice in relation to the structure and i given my situation i am going to purchase the property in my partner and my name. I already have advised the bank that i may use the equity in the property 1.
I regards to you comment to have a separate equity loan. I may not have that completely clear. Do you think that having a second offset account containing the redraw of the equity act in the same way than an equity loan. My understanding is that because i am going through refinances in the property first is that i have to take a loan for a higher amount and the equity can be ready to be withdraw or parked in an offset account. Any comments?Juan
Do you think that having a second offset account containing the redraw of the equity act in the same way than an equity loan.
Hiya
He means set up a whole new separate loan – you can park the funds in the loans redraw for future use.
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]
Being Halloween tomorrow I can say this.
“Be afraid be very afraid’ it sounds to me like your banker has no idea and i think you are heading to a classic case of cross collateralisitus.
No need for a separate offset account but a separate loan is imperative.
Cheers
Yours in Finance
0-40 Properties in a decade. Ask me how.Richard Taylor | Australia's leading private lender
never use cash to fund a property purchase, especially if it is an investment – if you can avoid it, and you always can.
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 Richard, Terry and Jamie. Awesome comments.
So taking in consideration all your contributions, let see the scenario:
1) Although the property is going to be IP for one year, still i should use the equity froom property 1 to purchase property 2
2) In order to use the equity of property 1 we should consider to take a different loan for the amount of the equity. This mean that i will have the property 1 loan, equity loan, the off set account attached to property 1 loan for 12 month and property 2 loan.Richard, I have discussed with the bank that i did not wanted collerateralised loans. I made clear that two different loans were important in this case. Why do you think this looks a case of classic collateralised loans? Would you mind to further explain. What are the benefit associated with having a different loan for the equity instead of redrawing the money into a separate offset account. i just want to get the facts right in place.
Thanks in advance
Manolo – simple solution is to hit up an expert to get this sorted.
Richard and Terry are going to give you much better advice/service than your local banker – why not ask one of them if they’ll take you on as a client. That way you don’t have the risk of stuffing up your loan structure and future tax deductions.
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]
Thank Jamie for your advice
Juan
Which Bank are we talking about ?
Cheers
Yours in Finance
0-40 Properties in a decade. Ask me how.Richard Taylor | Australia's leading private lender
Imb
Never use a bank for advice they just tell you whats good for them not you.
There to forms of debt, good debt and bad debt good debt is tax deductible like a IP and bad debt is not tax deductible like debt on the home you live in.
Equity gives you the ability to borrow for good debt in an IP.Pay off all your bad debt asap (home you live in) as this isn’t tax deductible
And claim the good debt as a tax deduction
I used equity in my home I live in to purchase 3 properties this year which are all returning over 8% which I think is a good return at the moment.
It will get tricky for you if you move from one property to the other as far as you go and you need to speak to a professional about that.
Cheers Good Luck
JohnnyK
If the deal sounds to good to be true ... dont worry it will be ...lol ...
Thank Johnny K. Yes it does make sense and i understand the principle behind. I just find difficult to clearly visualised the advantages of it. I like to see everything in a number and paper. Thanks to everyone for the comments.
The conclusion is that:
1) I am going to refinance the property 1: First. I am going to have one loan attached with an offset account for the outstanding debt in the property (this will represent non-deductable debt). Second, I will make a second loan secured by this property attached to another offset account containing the equity. Once i use the equity for a next deposit by having this two accounts i can separate non deductible from deductible expenses at the same time i will keep putting rent, salary any income into the offset of the first loan in order to reduce non-deductable debt. The second loan will be interest only and will be tidy and organise for when tax times arrive.On the other hand. I will have a next loan for 80% of the second property. This new loan is going to be secured by the second property. This will ensure there are no cross collateralised. This is going to be also deductible debt. As a consequence the IP property will have 100% deductible debt.
When i move into the second property i will have to recycle debt in order to keep it tax effective.
I have not chosen to get a line of credit given that in my case i do not see much benefits and the interest rate are higher.
I welcome everyone any additional information.
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