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  • Profile photo of hwd007hwd007
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    @hwd007
    Join Date: 2002
    Post Count: 247

    Well I guess you may draw down on one IP and inject the cash into the others making them cash flow positive. You then live of that income and claim the draw down as a tax deduction. All quite legal. Just a bit of simple tax effective debt restructuring.

    What ya reckon ? [8D]

    Profile photo of HueyHuey
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    @huey
    Join Date: 2003
    Post Count: 213

    I think overall it would come out the same when you take money out from 1 IP & put it in another IP. You would pay or get back the same amount of tax. [:)] Huey

    Profile photo of hwd007hwd007
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    @hwd007
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    Post Count: 247

    Yeah I sort of see your point. Let me re-think it

    …………..

    OK it seems to me that this is a way of getting some income. I see to some extent the tax neutralization argument, but the point is that you get income to live on by making some properties positive cash flow, whilst carrying a large debt on another. I mean you cant actually use the redraw to fund living expenses and claim the interest as a tax deduction. Thus by re-diverting the funds into other properties you make them cash positive and thus still get access to funds that way. This income can then be legitimately used for personal use. The interest then still becomes tax deductible as its is paid against the redrawn amount that is channeled into the other investment properties. You are still paying income tax on the cash positive properties, but as you say its sort of neutrally offset by the loss on the property that you drew down on. So in effect you get a tax deductible income stream .

    Do you think that makes any sense ?

    Profile photo of RedRed
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    @red
    Join Date: 2002
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    Hi,

    Sounds good….lets have a look.

    100k prop. @ 80% LVR. 80k owed @ %6 IO = 4.8k pa.

    Refinance other prop say 30K

    Now…..100K prop. @ 50% LVR. 50K owed @ %6 IO = 3K pa.

    So the diff is 1.8K pa or $34.61 More income per week

    But we forgot about the 30K’s interest….
    30K @ %6 = 1.8K subtract the extra income you are back where you started?

    Yes, No?

    There may be some extra tax concessions but this is a side issue.

    What do you think?

    Ross.

    Profile photo of hwd007hwd007
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    @hwd007
    Join Date: 2002
    Post Count: 247

    Yea I would need to do my own calcs. I guess the point is that even if its neutral, the income is income you would otherwise not have access to.

    Say you had two properties worth $100K both cash flow negative and owed 70K on each.

    The you redraw 20K on property B to put against property A

    Thus now

    Property A owes 50K and goes cash positive

    Property B owes 90K and remains cash negative

    Thus

    Income stream from A say is $100 / week
    Interest on A is $58 / week other expenses say $30 / week thus net cash profit on A is $12 per week

    Income stream from B say is $100 / week
    Interest on B is $104 / week other expenses say $30 / week thus net cash loss on B is $34 per week

    But the tax benefit may be ineffectual perhaps ? As the net profit / loss is merely being shifted between the two properties?

    I guess the only way I can see to improve the situation is to have your property revalued and then borrow against that so you can borrow more money against it the fully pay off property A so it generates more cash flow.

    Its really an argument of cash flow and where the funds are coming from rather than what offsets what. From a legal tax standpoint I mean. The flow is diverted from cash drawn down that you cannot spend for personal use, but put back into other investments that generate income which you then can use for personal use.

    Thus even if the net monetary effect may be neutral, the flow of money in terms of its source and the tax rules that govern interest deductibility on redraws etc… seem such that by re-diverting the flow of money it becomes usable for personal use and yet the interest is still deductible on the redraw.

    I’m still learning. just a thought.
    back to the drawing board ! i will keep trying.

    Profile photo of scottscott
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    @scott
    Join Date: 2003
    Post Count: 110

    Hi,
    From what I’ve been told you can spend drawn down funds on living without paying tax on that ammount. While the interest payments aren’t tax deductable, the money incurrs no tax because it is only borrowings not income. Not a bad ploy if you already own a neg geared high growth IP, and need some cashflow(so long as the growth far exceeds the interest rate!). You still get stuck paying tax on the CGs that you are borrowing against when you sell though (there’s no avioding the tax man), a point to consider when using up your equity. I hope that made sense it’s been a huge day![;)]

    Cheers
    Scott S

    “Aim for the stars and you’ll shoot the top of the telegraph pole. Aim for the top of the telegraph pole and you’ll shoot yourself in the foot!”
    -anon

    Profile photo of hwd007hwd007
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    @hwd007
    Join Date: 2002
    Post Count: 247

    Scott,

    Can someone inherit your debt on a property ? I mean you could draw down say 90% then sell for a small CG well under market value with a private sale, then get the buyer to pay off your debt to the equivalent amount that you undersold the property for. Hey they both win with less CG tax and less stamp duty. hehe.

    Reckon that would be legal? Admittedly when the buyer then on sells, they will face a bigger CG tax burden due to buying it under market value up front. Perhaps there’s a meeting point half way somewhere. Draw down 50% and sell the property at an equivalent discount. Buyer pays off the 50% loan but pays the equiv amount for the sale.

    1. Is it legal to pay off someone’s debt
    2. Is legal to sell under market value.

    I know it sounds a bit scammy, just a thought.

    cheers.

    Profile photo of TerrywTerryw
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    @terryw
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    Hwd

    Sure it is legal to pay off someone else’s debt. But in Australia, you can’t assume someone else’s loan. (I think you can in America).

    And it is legal to sell for undermarket value, but you must pay stamp duty and CGT at market rates-otherwise it is fraud.

    And I don’t knwo about you example above, I don’t think it would make a difference in cashflow etc.

    One good reason to pay off one loan and increase the other would be get completely clear the mortgage on one and get the title deeds back. it give the bank less security.

    Terryw
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of hwd007hwd007
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    @hwd007
    Join Date: 2002
    Post Count: 247

    Aahhhh good idea to get those title deeds back ASAP. At least on the roof over your head.

    Thanks Terry

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