Hi IP

I would say no, you cannot claim the interest as your bills have already been paid. It is a bit of a grey area though. Maybe you could get all your bills to you direct so that you could pay them yourself, except for the management fees – but maybe you could work something out with the agent about this too as it will help you to save interest on your home loan.

Hi Swany

It will cost you more in tax if you pay anything off your loan. Ideally a IO loan with a 100% offset would be ideal as you can keep your loan balance high and save interest at the same time. This will save you tax when you start to rent it out.

If you were to pay down the loan to $20,000, then your annual deductions for interest will be around $1,600. If you then increase the loan you would not be able to claim any of the extra interest. Where as if you put the money in an offset account, your loan is not being reduced so when you take the money out the interest will go up on the loan and so will your tax deductions.

Many lenders will only lend to self employed, on low docs, and the best way to prove self employment is through an ABN. ABN's can be checked at http://www.abr.gov.au and this will show date of registration and date of GST registration (if any). There are some low doc lenders out there that do not require an ABN.

The ABN doesn't have to be for the entity purchasing, but could be any ABN for a related entity. eg. you may have a new company/trust buying which had just been set up, and prove your self employment by showing a business ABN from a few years ago.

TenorBb

I wouldn't recommend a LOC for your general loans either, but would recommend setting one up for any spare equity you have.Investment expenses and costs can then be borrowed from the LOC freeing up cash to place into your non-deductible home loan.

However, Your two properties value at $604,000. 80% LVR is $483,000, but you have current loans of $487,000 so you would not have much equity available, even if you went to 90%.

Hybrid

LOCs are not bad, but a lot of people have no knowledge of the tax laws and are creating potential problems for themselves mixing business and non-business. I had one person take a LOC on their investment property and then place all their wages into the account each month to save interest. This taxation suicide which could have been avoiding by using a IO loan with an offset account instead.

I have a client who purcahsed an Investment through a hybrid trust in QLD, and he has just purchased another home to live in and he has applied and received the FHOG in QLD.

Hi Mixedup

I clicked on the link in your post, but it brought me back to this post.

I agree with Richard again. Once you have paid into a loan, redrawing money is considered new borrowings and the interest on this new borrowings will only be deductible if the money redrawn is used for investment purposes.

Hi

Which type of trust you should use will depend on your exact situation – maybe a unit trust (as 2 parties) or a discretionary or a combination (hybrid) or both Unit trust with units owned by your discretionary trusts (one each).

You should seek some professional advice from your accountant in conjunction with your mortgage broker when setting up a trust – who will be trustee and named beneficiaries will have far reaching consequences.

If you have equity you may want to lend this to the trust to get it started, but this will leave you exposed to creditors if you go down. If you gift money to the trust, then you may have tax problems as you may need to borrow to gift and then would not be able to claim the interest on this. Your trust may be able to take a mortgage over your property etc, to tie up the equity and make the property less attractive to creditors if you are sued.

Not sure what you mean by becoming a sole trader to boost serviceability though.

You could possibly sell part of the property to your wife or trust over a few years to reduce the tax burden.eg a third each year for 3 years. It may also be possible to sell using an option. eg. if selling for $300,000 you could sell an option this year for $100,000 with an agreed price of $200,000 with settlement next year. This would split the gain over 2 years.

If you must sell this year, then you could also look at prepaying some interest, if you have any other properties. You need to bring as many expenses forward as possible.

Talk to a few creative accountants as there is a lot of money involved.

Is your new house going to be your main residence? If not, it would not be wise to pay the loans down. Selling maybe a good idea. But don't rush into it as you may be just selling one property to buy another and incurring costs unnecessarily.

Trusts are still the best structure for asset protection available. Your accountant may be referring to a recent case, Richstar v ASIC I think, in which ASIC sought to get access to the trust assets of a person who had the role of appointor. The case has been discussed by various legal firms (eg see the newsletters of http://www.lawcentral.com.au) and there seems to be ways in which the trusts can be worded so that make this less likely. eg the appointor automatically losing their role of appointorship if they become insolvent etc.

Hi Mooki

There are a few ways to do it, but one of the best is to set up a LOC (Line of Credit) on your existing property and to use this as deposits and costs for the new one.

e.g say your house is worth $400,000
80% is $320,000
But you have a current loan of, say, $200,000
This would mean a LOC of $120,000 could be established (subject to serviceability etc).

You then buy a $200,000 property.
20% deposit is $40,000 and 5% costs $10,000 = $50,000. This would come from the LOC.

You would then go to a bank, maybe a different one to your current lender and borrow 80% of the purchase price, $160,000.

So for this new investment property you would have borrowed 105%, have 2 loans (both deductible) and would have both properties stand alone, not cross collateralised.

You would then have some spare equity in the LOC and will be able to borrow IP expenses from this account, saving your cash which can be used to pay down your home loan first, increasing your deductions. You will also have some left over for the next IP.

After a while you can increase your LOC, as values rise, and repeat the process. Furthermore, you may be able to set up LOCs on each investment property as they grow and buy even more properties even quicker.