You would want to keep your cash for your non-deduction debt usually. Probably a good way to proceed would be to lend money to your trust by borrowing it from a LOC secured on your main residence at the same rate you are being charged. Any less would cause tax issues.

If the trust does go down then you as the lender will probably only lose the money lent and not your house. if you let the trust use the house as security then it would be more risky.

You can tell the lender to do anytihng, but they won't be contractually bound so they can sell to another even if they take it off the market. They may keep it for you or may not.

You cannot claim anything as you wonn't own the property. The trust can claim all the usual expenses though.

Slow down.

Just because you have found a cashflow positive property doesn't mean it is a good deal.

What do you need to know? You shouldn't be signing any contracts before talking to a solicitor (and not an annonymous caller). If you don't have a trust set up before you sign then you will be charged double stamp duty in WA if you sign and later put it in the name of a trustee.

Sounds like he may have suggested a LOC for the deposit and and another main loan with the offset?

But, if he suggested you borrow and place money into an offset then this is dangerous. You would likely lose deductibility of the interest.

If you do use a LOC for the deposit you should never deposit wages etc into this account or you would end up with a loan where none of the interest is deductible.

If you have no personal debt, a discretionary trust may work well. Expecially if you intend to pay the loan down. You need to consider this carefully.

2 Commnets on using the LOC to purchase outright.
1. If in the unlikely event that you default on the loan, would you prefer the bank take the investment property or your house?
2. Using a LOC like this would be dangerous and result in you paying more tax.

Bob,

If you have no non deductible debt then it would be ok to use PI loans for property – especially if this is what you feel comfortable with.

But, by using IO loans you will be paying less per month in repayments which may mean that you could afford more properties.

Also by paying down a loan you are tying up your cash. This would be available by redraw or reborrowing, but you would have tax issues if you wanted to use the money for personal reasons – such as a new car or an upgrade of the main residence.

This doesn't work.

Using trusts won't help you own any more properties and it could all be done in your personal name – but I think that would not be a good idea for a number of reasons.

The law says that interest in deductible if the funds borrowed are used for investment purposes. The ATO has also confirmed that interest on interest would be deductible where the original borrowings is for investment purposes. But they have said in TD 2011/D8 that they will disallow the deduction on the capitalised interest if the dominant purpose if to pay off your own home loan sooner. They do this under Part IVA of the ITAA 1936 if you are doing something with the dominant purpose of obtaining a deduction.

Therefore, you could be able to claim a deduction if the reason if the dominant purpose was not to claim an extra tax deduction but for other reasons. One reason that may be applicable could be for cashflow.

So in order to be safe if could be a good idea to apply to the ATO for a private ruling, outlining your situation and the reasons for doing this and then asking would the interest on the LOC be deductible?

You can apply for a private ruling by doing it yourself, search the ATO website, or using a tax advisor.