Dear all,
I am new to investment and keen to invest after reading Steve’s books. I want to finance my investment from equity of my home property. When I draw money from home loan, the interest will increase accordingly. However, this part of the interest will not be incurred if there is not investment. Therefore, it is part of costs of investment. However, it is interest to my home loan which ATO probably considered as private usage. How could I legally transfer this part of interest into the tax deductable expenses for my investment?
Thank you!
FrancisHi Francis
I’m no expert but have been getting set-up for investing over the past few months. I, too, am using equity in my PPOR to finance investments. I have set up a line of credit specifically for investment purposes and will use this to pay deposits, solicitor fees, stamp duty, etc and will get a bank loan for the balance therefore the interest charged to the LOC will be tax deductible.
Hope this helps
ShelleyTax deductibility depends on the purpose in which the funds were used, not the security used.
So if you increase you home loan to buy shares/property the extra interest incurred would be deductible.
The problem lies in determing the extra interest if you have one big loan.
eg. If you have $50,000 owing on the home loan and then borrow another $50,000 for investment, in one big loan when you make your monthly repayment, the ATO may consider you to be paying 50% of each payment off each part of the loan. You will be paying off deductible debt when you should be paying off the home loan first.If the portions are not equal it will be hard to calculate the interest owing on each portion.
So a better option would be to take out a separate loan for the investment, make this interest only, and pay the minimum.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]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 Francis,
As Terry mentioned you will need to keep the 2 loans separate,
I would suggest a split loan; this will help in keeping track on repayments of deductible and non-deductible debt.
You should also consider an offset linked to the non-deductible portion of the split. This can help reduce the term on non-deductible debt.Use the funds in the investment split for future deposits on separate loans, this structure will help avoid cross colaterisation issues on future investments.
Feel free to contact me if you require clarification or help in setting up this structure, Cheers.Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Originally posted by Terryw:If the portions are not equal it will be hard to calculate the interest owing on each portion.
Hi Terry,
While splitting loans is by far and away the better option apportioning costs can still be undertaken even if amounts within the loan are different.
For example assume $75K (deductible) and $25K (non-deductible) are in a single loan.
In this instance 75% of the interest costs are deductible and 25% are not.
Now assume a $20K windfall comes along and is paid into the loan account so that total debt is now $80K.
The ATO will not allow you to say the $20K went to my non-deductible debt (unless it was split off of course). The ATO will say that the repayment is apportioned across both parts of the loan – notwithstanding this the proportion (ie 75%/25%) remains the same, it is just that the total interest bill has reduced by a factor of $20K.
Now a LOC, on the other hand, os nowhere near as simple and I for one would not even consider using a LOC with mix incomings and outgoings as the paper trail is horrendous.
Derek
[email protected]
0409 882 958
Property investment advice and researched property in quality locations available.Dear Shelley, Terry, Steven & Derek,
Thank you very much for your advise!
It seems LOC is a popular strategy used by investors since I found this term everywhere in this forum. I have spoken to a bank. However, I couldn’t understand how the home loan, investment loan and LOC tired together?
I would be very grateful if anyone could explain this. Thank you very very much!
Regards,
FrancisHi Francis,
Assume you own a house worth $300K with a current mortgage of $100K.
A lender will recognise 80% of the value of the property = $240K.
As you already have a mortgage debt of $100K the bank will allow you to set up a line of credit/equity loan etc for $240K – $100K = $140K
In this scenario both the mortgage and equity loan are secured against your home.
The $140K in equity/loc allows you to draw these funds and use them as a deposit on other properties. The balance of these funds can be sourced from anywhere – you are not restricted to your home lender.
As an aside the bank may not be the best person to speak to – their lending policies may not suit your particular set of circumstances.
The only other point I would add is that do not mix your private and investment expenditure in a single equity loan/loc – the tax matters become quite onerous. If you do want to use some of your equity/loc for personal matters then split the $140K into two accounts – your accountant will love you [exhappy]
If you need enaything else clarified feel free to PM.
Derek
[email protected]
0409 882 958
Property investment advice and researched property in quality locations available.Dear all,
Thank you for your advises!
Now, I have some ideas. However, it seems most investors are using LOC. But, I have the following questions:-
1. When property price dropped, will banks change the LOC amount?
2. What is the advantages of using LOC instead of refinance the property?Thank you in advance!
Regards,
Francis
[laughing]
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