Negative Gearing – Tax Question

Couple things:

You won’t borrow 100% on the existing property – you need to retain some equity in there, ie 20% of the value if you want to avoid LMI so that would provide you with a maximum of $480,000.

In reality however you cannot claim tax deductions on this loan if it’s being used as a deposit for your new personal residence – as its not for investment use.

The ATO does not look at what property that the debt is attached to, but what the purpose of the funds are. ie in this example the 480k would have been used to purchase a new residence, so no deductibility.

To try gain deductibility on the debt you could potentially either sell the property to a spouse or a trust you control to then allow you to re-gear the purpose and direct the funds for the deposit, but this will trigger stamp duty and potentially other tax events – best to speak with your accountant.

It depend son your definition of ‘paid off’

There are 2 possibilities

A. Loan balance of say $400,000 with $400,000 cash in the offset account

B. Loan balance of $0 with an offset account (which offsets nothing)

With Option A the property isn’t paid off, but the loan is fully offset. If the cash in the offset is you personal cash, and not borrowed, and the loan has never been redrawn then if you moved out you could claim the full interest on the $400k once the property is available for rent.

With option B the property is actually paid off – but redrawing to use the money for a new main residence the interest will be a private expense and not deductible.

The situation is unclear because you say ‘paid off’ but also you state you have an offset account – which would be impossible if it is paid off, but possible if the loan balance is zero (but unusual). You also say ‘remortgage’ which implies there is not mortgage and if there is no mortgage the loan would actually be paid off – but you couldn’t have an offset account on it if it was!