Can somebody please confirm if this is the Ideal setup for PPOR and IP loan to make best use of funds..
I have combined information from current and previous posts. This is assuming you want to have offset account only (no LOC) and PPOR may be turned into IP in future.
PPOR and IP loan with different lenders.
(1) PPOR (IO Loan) (non-tax-deductible)
– Have an 100% offset account linked to the PPOR loan
– All salaries goes to this offset
– All rents from IP goes to this offset
– Personal bills, personal purchases and loan repayment are paid from this offset
– Credit card can be linked to offset if required(2) Investment (IP,shares,etc) (IO Loan)
– Set up a Offset when you have build up enough equity in IP (To start with, you may have to put funds into offset yourself)
– IP interest, IP bills and capital for share trading are paid from this OffsetWhen you have build enough equity on IP, top up your offset attached to IP which can be further used to purchase subsequent IPs. (Not sure if increased equity can be added to the existing offset of the IP loan to fund future IP purchases or new offset has to be setup)
When you have build enough equity on PPOR, go to maximum LVR (85% or 90%) allowed by Lender and use equity increase to setup another loan account. (These funds can be used to pay for deposit and other initial cost for subsequent IPs)
Please advise if I have missed out anything??
I think you may have confused a few things there.
Why bother with an offset on the investment property? I would not use one there until you have fully paid off the PPOR loan or have the 100% offset attached to this at the level of teh loan.
I am not sure what you mean by " Set up a Offset when you have build up enough equity in IP (To start with, you may have to put funds into offset yourself)". I would be putting all income and savings into the PPOR offset and paying everything from there. The reason for this is that money in the PPOR offset will be saving you interest which isn't deductible whereas if you had put money into a IP offset you will be saving interest, but this will be reducing your expenses and thereby mean more tax is payable.
Also not sure what you mean by "When you have build enough equity on IP, top up your offset attached to IP which can be further used to purchase subsequent IPs. " You can only increase an offset by adding cash into it. If you have equity what you would want to do is to borrow against it.
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
Apologies for delay in replying..
Terryw wrote:Why bother with an offset on the investment property? I would not use one there until you have fully paid off the PPOR loan or have the 100% offset attached to this at the level of teh loan.
So are you suggesting all IP related expenditures to come out of the same offset attached to PPOR?
Terryw wrote:Also not sure what you mean by "When you have build enough equity on IP, top up your offset attached to IP which can be further used to purchase subsequent IPs. " You can only increase an offset by adding cash into it. If you have equity what you would want to do is to borrow against it.Agreed, my mistake, when equity has been build up, setup new loan account for the same amount (borrow against it) attached to IP which can be used to fund 2nd IP deposit.
So structure will look like
(1) PPOR (IO Loan) (non-tax-deductible)
– Have an 100% offset account linked to the PPOR loan
– All salaries goes to this offset
– All rents from IP goes to this offset
– Personal bills, personal purchases and loan repayment are paid from this offset
– Credit card can be linked to offset if required(2) Investment (IP,shares,etc) (IO Loan)
– IP interest, IP bills and capital for share trading are paid from the Offset attached to PPOR
– When equity builds up, borrow against it and setup new loan account.Please comment..
Thanks
AmanAman
that sounds much better.
Maybe you could have it so that there is a interest free credit card with points and all bills are paid with the credit card and this is paid offf in full each month. This will leave cash in your offset a few weeks longer saving you more interest and you will be able to get gift vouchers with the points that build up
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
Aman,
The one thing you should consider doing if you can is to also establish a separate LOC secured against your PPOR. I normally recommend a minimum of $120k for each median priced IP you are looking to purchase. The end number will depend on your borrowing capacity. This is a stand alone LOC just used for investment purposes, being the deposit for the IP and any investment expenses. Say $50k to $90k is used for the deposit, the balance is to meet investment expenses and be a safety net for you. It could be a 2 or 3 year buffer depending on how channel use the funds in and out.You use the LOC to pay for any investment expenses including the interest on the IP loan rather than the Offset. You use the Offset only for private expenses. In this way, you will increase your Offset faster and reduce the interest expense (or principal) relating to your PPOR loan.
Good luck
GregI agree with Greg – but just make sure you seek expert advice on setting this up or the ATO can disallow it. A recent application for a private ruling on something similar was rejected by the ATO. see http://www.bantacs.com.au lastest newsletter.
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
Terry,
That article is a bit of a worry as it goes against some common advice being given to property investors.
I'd be interested to read about any similar cases you know of, or any which arise in the near future.
Thanks for the reference.
Terryw,
I agree, you need to take care in setting this up. The issue should not be whether the interest on the LOC is deductible but you are paying off your home loan sooner. The purpose is still critical.The initial setting up of this LOC and the amount needs to be in line with what your needs are, so the higher amount the more flexibility you have as long as it is not so high as to limit future borrowings. In the private ruling you mention, it seemed that the linked loans were the issue where to increase the LOC the taxpayer had to reduce the home loan, perhaps keeping the overall facility the same but changing the mix.
The use of an Offset combined with this may have made a difference. Interesting times.
Good luck
GregI've done a search on the ATO site for the ruling, but it hasn't been published publically (yet?). WIll be interested in reading it.
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
Hi All
In the process of setting up finance for my first IP.
We have PPOR in joint names. Have made an application for a LOC loan against this property. Tried to put this loan in my name only but the bank wants my wife as co-applicant or guarantor ( for a $200 fee). Does it make any difference which option I take on this loan? My wife only earns about $5k as year so will not receive any tax benefit. I wish to be able to claim the full deduction.
The second loan depending on the IP purchase price may also need my wife as co-applicant or guarantor. Will a bank accept having both our names on a loan and only my name on the property title so I can again claim all of the tax deductions?
Deductions?will depend on what the money is used for and who is the owner of the asset being purchased.
eg if you buy a property in your name only you will claim the deductions. If you use a wife as guarantor it won:t matter for the claiming of deductions, you will still g et all the deductions and profits/losses.
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
Terryw wrote:Deductions?will depend on what the money is used for and who is the owner of the asset being purchased.eg if you buy a property in your name only you will claim the deductions. If you use a wife as guarantor it won:t matter for the claiming of deductions, you will still g et all the deductions and profits/losses.
Thanks Terry. All borrowings will be used for the IP and IP expenses. Does it make any difference if she is a co-applicant rather than just a guarantor?
No sure why you would want to double your risk and add your wife to the loan/guarantee. If the investment doesn:t work you both sink with the ship then. It also will hurt further borrowing capacity. It may be necessary for the LOC as both names are on title, but not for the investment.
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 again. That’s what I was asking. On the LOC the bank tells me she has to be included. Does it make any difference if she is co-applicant or guarantor?
nope.
Talk to your accountant about tax issue, but i htink you can just claim the interest yourself.
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
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