Hi
I have a investment property that is currently being rented out. My question is if I make a lump sum payment off the loan principal, can this be offset against my gross income?
Example, I owe $300k on the loan, can I make a $25k payment off the principal, can I claim this when it comes to tax time?
I guess the bottom line of the question is, can the principal part of the loan be offest against my gross income at tax time, or is it only the interest repayments?
Thank
TimHi Tim,
No, unfortunately payments of principal can not be claimed as a tax deduction.
As a general rule, it is only costs incurred in the earning of your investment income which can be claimed.
eg: Interest is a cost of the principal of the loan, but the principal itself is not a cost or an expense.
Tim,
As stated above, only the interest costs will reduce your taxable income….. i.e. the principal repayment is not a cost of earning your gross income.
Further, you should never pay this debt down. Think about future tax deductions if you require the money for a non tax deductible asset. I see the words "offset account" splashed all over this site…….. Now this is the time, and real benefit of an offset account…….
number 8 wrote:Further, you should never pay this debt down.Hmmm….I wouldn't go so far as to say 'never' as it depends on individual circumstances. But generally, loan with offset account is a sound structure that allows you flexibility and doesn't cause any probs in relation deductibility.
Cheers
Paul.
Paul,
What is one good reason for paying this down as opposed to utilising an offset account?
I have the answer – Don't respond.
If you have no discipline, and you are going to spend this money on depreciating assets.
So almost, NEVER………
http://www.birchcorp.com.aunumber 8,
There are several, but never mind, you probably wouldn't be interested.
Please talk, I am very interested.
thanks all, the mortgage on this loan has an offest that 100% of my pay goes into (I have a casual job that provides spending money), so I'll just keep piling the cash in there.
Tim1. Despite having large amounts of cash in offset accounts, the bank may stop lending to you at a cetain debt level – For instance, even if some people have loans which are fully covered by offset cash, the bank will still only lend up to a cetain level based on serviceability if the borrower was to remove the cash the next day and spend it all on a holiday.
2. Depending upon the age and the 'stage of life' of a person, they may decide that they would like to pass on unencumbered property or other assets to their family upon death, rather than a property with a loan, and a whole heap of cash against it. The latter could cause taxation and estate planning complications.
3. Family/Child support situation where payments need to be made, and bank statements are required to be provided to assess available income.
4. Loan in joint names where one party (ie: husband or wife) wants to spend the available cash "because it's there" where the more investment minded partner doesn't (similar to your discipline comment)
Those are the first few that came to mind.. Happy to consider a few more if you are still interested…
As a side note, I will always have I/O loans with offset accounts, but it isn't suitable for all situations.
…and I'm glad you changed your response from "Never" to "almost never" – thanks.
You have one valid response, of which none are good reasons, so I will maintain "Almost never"
1. You can only borrow the same amount of dollars regardless. i.e. loan capacity is the same. e.g. offset =$50K+ borrowings=$250k v offset = nil + borrowings $300k Both add up to $300k to me?
2. What are the estate planning and taxation consequences-if any? A little open ended?
3. Valid- but where this arises, a simple deposit works well.
4. As I have already suggested- poor discipline- same thing, different spin.I am still interested……….
You say you are interested, however seem quite sure that "non are good reasons" of what I have provided so far, so this is the last time I will explain.
1. Just because both add up to you doesn't mean that both will add up to the financier – The servicing capacity concerns are still there for the bank as the person borrowing the cash could take funds out from the offset at any time, and then be left with the loan balances. As you provide mortgage broking and financial advice, you should be all over this sort of thing.
2. Without going into detail on estate planning (for which I am far from an expert), perhaps some people would just like things left in a nice, neat state to pass on to their relatives? Many people pay down debt for peace of mind, which is probably another valid reason to pay off principle.
3. I understand your point, however whilst income and asset testing is generally done on a net basis, I am sure the solicitors of the opposing party would have a field day with half a million bucks sitting in an offset account of an ex husband or wife.
4. noted.
1. I can borrow the same number of dollars, you read too much on how you cannot get cash out etc. The $$$ are the same. As you mentioned I do these often.
2. Peace of mind (sorry, I look at the numbers first – intrinsic feelings cannot buy a house- research the reasons why you should not pay down debt v feeling good about yourself).
3. Sorry, you have lost me here, are we talking about FTB/Child support or divorce settlements?
Agree to disagree?
1. Your right, I have never done this for a client with $30M, but $450k is the norm… I am being realistic.
2. If i did not look at the numbers I would be doing all my clients a poor service – litigation.
3. Still not over this one……..
Anyway, happy to have this conversation again with another topic……. this is what is good about this site. Learning and thinking with like minded, intelligent people. Cheers
No probs.
Like I said, I'm still a fan of Interest Only & Offset!
Until next time!
Just a point for number 8.
Working over ten years in both commercial and retail banking – most clients with int only and offset do not have cash in offset equal to the amount their loan would have reduced if p+i.
200k over 30 years at 6.5% is approx $1264 versus approx $1083 Interest only. I don’t think I would notice the $179 per month.
Its interesting that after 5 years people on IO don’t seem to have more money in their savings account than people on P+I.
There are two ways to get equity in property. One is growth and the other is amortization of debt. if you are 30 years old and have 5 properties on 30 year terms – At least you are guaranteed to have 5 properties debt free at 60 (if you just see the loans through)
Interest only is good in theory. In reality the average person will spend more when they have a higher level of disposable income.
Is IO better than PI or PI better than IO – Both have advantages and disadvantages.
Bit like cross collaterisation…
Thanks number8 and YI!
You guys have both generated a good discussion on this post!
I'm always willing to learn and I'm glad to see such great responses from both of you guys!
Thanks Banker as well!
Banker, sits on the fence.
Try $400k for a typical loan, and you will find that there is a large difference, in fact it is enough to purchase another property.
Hey, but if your not interested in making money, you can sit there like average Australia and pay off you home until you are 50-60 years of age and then you will invest. In the meantime I have retired at 34 years (10 years experience counts for nothing when when you still have to get up and work each day- not saying this is you but it is most of Australia). When you give examples please keep it real, as you are helping people on this site. It is not a competition, but a forum to guide people through the investing maze and the pitfalls.
I am not sure what you are saying about the money in the offset equal to the loan. You must have mis-interpreted what I had to say. I am unsure why the experienced guys do not get this, MONEY IN YOUR OFFSET IS UTILISED TO PAY FOR FURTHER ACQUISITIONS- THIS IS HOW YOU MAKE REAL $$$$$$$.
Why do you want 5 debt free when the numbers work better having 30 properties with debt. Oh! if you really must have debt free- sell 20 at that point and have 10 debt free. (I keep forgetting about peace of mind) And really, how many clients do you have with incomes large enough to pay down 5 properties, this is not realistic. (excluding properties that are $50k – postive geared or like).Sorry, and who are you helping?????? I can answer that , that will be yourself…….
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