I need some solid advise urgently.
I have just bought IP’s 3 and 4. I’m think about prepaying the interest 12 months in advance to get the benifit this year. The bank will also give me a 0.2% reduction in interest.
I wwould need to use my line of credit on my PPOR to pay the interest. Approx 50K total.
Is this 50K tax deductable?????
In effect I’m borrowing the 50K at say 7% to prepay the interest on the IP’s.
I’m very uncertain about this. Any accountants out there?
I’m not an accountant but I don’t think you could claim the interest on the 50K LOC, as you would be claiming the interest on borrowed funds for the purpose of paying interest on borrowed funds, I would strongly urge you to get professional advice before you proceed, 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.
I am with Steve. The 50k would be deductible but not the interest on the 50k.
Also not an Accountant.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
I am not an accountant either, but I have spoken to my tax advisor about something similar. He said there is no requirement to pay cash for anything investment related, including interest, and you can claim interest on money borrowed to pay interest on investments.
This was informal advice off the top of his head, so he may be wrong.
Please speak to someone qualified to answer before doing anything. And let us know the result.
Terryw
Discover Home Loans
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
Terry, instead of continually directing people to do what is potentially incorrect or illegal and may result in great expense down the track, why don’t you ring your ‘tax adviser’ and get some more formal information about this.
If the cost is a problem, tell me his details and I will arrange it. My advisers tell me deducting capitalised interest in this manner is not permitted which is supported by nearly every article I have read about the subject since Hart’s Case.
I hope more than anything that I am wrong as it would be nice to be able to do this without getting into trouble.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
OK I just received an email from my accountant.
Here it is:
“The interest on the line of credit is not tax deductible so your saving will be lost but you will be bringing forward a tax deduction applicable to this year.”
He has recommended I do this for one of the properties and keep the other to IO.
I guess at the end of the day, if you use a LOC, there is no difference between paying out 28K now or paying out 28K over 12 months. You still pay the interest on money drawn from the LOC.
The advantage is bringing the deduction forward one year. That will certainly help me this year.
Hope this helps everyone.
It certainly helps reinforce my strong stance on the illegality of deducting capitalised interest in this manner.
Thank you for sharing.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
I just spoke to my tax advisor. He said it would be possible to claim the interest on the LOC if it was used to prepay interest on an investment loan. But there are various rules with regard to claiming of prepaid interest, so you may not gain any benefit if you do it incorrectly.
Terryw
Discover Home Loans
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
Terry, instead of telling everyone they can do it and saying that it could be a problem if done incorrectly, why not just tell everyone how they can do it correctly.
Surely one of the many accountants on this site can assist here.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
A side note on the main question – if I were paying my whole year’s interest up front, I would expect a better reduction than 0.2%.
You might get the tax deduction up front, but you’ll also now have a $50k debt on your PPOR as a result, no? (perhaps reduced somewhat by the tax deduction… but depending on your tax bracket probably not by *that* much).
So the bank takes your $50k upfront and invests it to make themselves more money, when you could use the equity in your PPOR to buy another property instead – making more money for yourself while pacing your repayments.
Even if you’re not interested in that – I would be asking for at least 0.5% off if you’re going to pay your tax upfront (as the bank will make more money out of your money this way. Double dipping, so to speak).
Luci, that is a huge reason why I think that people who plan their investments around tax deductions as opposed to making more money are crazy!!!
The Mortgage Adviserhttp://www.themortgageadviser.com.au
Paul hasn’t explained his reasons for wanting to prepay. It could be he has a capital gain this year and he wants to reduce his income to reduce this one off tax. Bringing forward expenses can do this.
Rob, I am not sure of the reasons that prepaying may not work. My accountant explained, but it went over my head.
Terryw
Discover Home Loans
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
I meant the ‘living off equity’ thing.
Regarding the pre-paying tax (or anything for that matter), I am a firm believer of paying everything as late as possible. Money is more valuable in my hands than someone elses regardless of the deductibility. I like to make more money and pay more tax first and then work out how I will pay less tax later.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
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