All Topics / Help Needed! / Where should the rent go?

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  • Profile photo of chappy1970chappy1970
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    @chappy1970
    Join Date: 2011
    Post Count: 23

    So I take posession of my new IP in early August and all things working out should have a tennent around the same time. Quick question to those more experienced than I, which acount should the rent go into?

    I have a PPOR loan (i9nterest only) with a Savings Account used as an offset account.
    Then I have my dedicated IP loan wich is Interest only.

    Should the rent be paid into the IP loan directly with the differential paid from my PPOR loan into my IP loan each month? or should the rent be paid into my PPOR loan and the whole interst payment for the IP loan paid monthly from the PPOR?

    Your advice is appreciated

    Chappy

    Profile photo of xdrewxdrew
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    @xdrew
    Join Date: 2010
    Post Count: 479

    Answer is quite simple and logical.

    Your PPOR is the one which will (at the moment) be CGT exempt. So any money you pour into your PPOR reduces your ongoing interest liabilities, saves you money and time on your mortgage, and because its CGT free .. adds to your pocketbook wealth.

    Your IP is geared so that your major achievement is what you DONT pay on your investment over time. Other people's money is making money for you .. and all you do is pay the interest and reap the rewards. However .. a gradual reduction on this (minimal though) is a good idea as it reduces your exposure to higher interest rate environments once the interest only period is finished.

    So both properties have their merits. If you have flexibility .. split 60/40 between the PPOR and the IP. The PPOR is like saving .. the IP is reducing your liabilities in the longer term. And both situations have their long term advantages.

    Profile photo of Josh AthertonJosh Atherton
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    @josh-atherton
    Join Date: 2011
    Post Count: 269

    agree with xdrew…It may be easier for accounting purposes to have a separate account for your IP. If you do this just create another offset account and have offset against you PPR.

    Also just a tip, make sure that the managing agent disperses any rents received on a weekly basis (or even daily if possible but not many do this). That means that the rent can sit in your account reducing your interest rather in the agents trust account.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Look have to say i disagree with the previous coments.

    Unless you are 100% sure you will be residing in the current PPOR forever and a day and will never rent the property I would recommmend you put all of the rent and your salary etc into the offset account (assuming it is a fully transactional 100% offset account) linked to the PPOR and have the IP interest debited from the offset account once a month.

    I would also make sure the PPOR loan iis interest only at the same time and you should be good to go.

    Cheers

    Yours in Finance

     

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of chappy1970chappy1970
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    @chappy1970
    Join Date: 2011
    Post Count: 23

    Thanks Richard,
    This is my first IP and after seeking advice from an expert, my wife and I recently converted our PPOR loan to IO.

    Presently we have both mine and my wife’s salaries going into the PPOR IO loan.

    We have a savings account, but this generally only holds a couple if hundred at any one time which is what we use for carry around cash I.e. Coffee, lunch occasionally, etc.

    We purchase most things on the CC and take advantage of the 45 days interest free and pay it in full every month. We have been doin this for 10+ years, so we are very disciplined.

    The PPOR loan is currently $195k of which $45k is there for the equivalent of redraw.

    Chappy

    Profile photo of bjsaustbjsaust
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    @bjsaust
    Join Date: 2009
    Post Count: 141
    chappy1970 wrote:
    I have a PPOR loan (i9nterest only) with a Savings Account used as an offset account.
    Then I have my dedicated IP loan wich is Interest only.

    Is the savings account a 100% offset v's PPOR loan?

    When you say all your salary goes into the PPOR IO loan, do you mean directly onto the loan itself, or into the savings account?

    Assuming its a 100% offset account, I agree wholeheartedly with Richard. Put every cent you earn into the offset account. That has the same effect of reducing interest on your PPOR (interest which is non-tax deductible) and have the interest for both the PPOR and the IP taken out of the offset account. This means the maximum amount of your money possible is reducing your non-deductible debt.

    Now, if you happen to stay in your PPOR forever,  you're no worse off than if you had paid down the loan instead. Thats the purpose of the off-set account. If you sell, same deal. However if you do as a lot of people on here want to do, which is to move out and keep it as an IP then theres a big difference. If you save say 100k in the offset account, you can withdraw that (as its just savings) to use as a deposit on your new PPOR, leaving the existing loan on your current PPOR (which will become an IP) at the full amount. This debt is tax deductible now, and the debt on your new PPOR is a reduced amount.

    On the other hand, if you've dutifully paid down the loan itself on your current PPOR, then when you redraw/refinance to purchase a new PPOR, the entire debt is non-deductible.

    Big difference.

    Profile photo of DafnnyDafnny
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    @dafnny
    Join Date: 2011
    Post Count: 18

    All our rent money is put into the offset account and thats were it builds up and we save on interest.. but its up to you :)

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    The offset account on the main residence is the way to go.

    The reason has nothing to do with CGT (loans don't affect capital gains or CGT) but to do with deductibility of interest. You would want to reduce the amount of non-deductible interest payable before any deductible.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of tfpsaletfpsale
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    @tfpsale
    Join Date: 2011
    Post Count: 4

    I prefer you just make it into 2, half for the the IP loan and half for the PPOR loan.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    tfpsale wrote:
    I prefer you just make it into 2, half for the the IP loan and half for the PPOR loan.

    Why?

    Firstly, 50% of the rent is unlikely to cover the IP loan.

    If you are talking about paying 50% into the IP loan over and above the interest then this is not tax effective. They would be reducing their tax deductions while still having debt they could not deduct. Its like throwing money away!~

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of chappy1970chappy1970
    Participant
    @chappy1970
    Join Date: 2011
    Post Count: 23

    If i have my salary (and my wife's) go into the PPOR (IO loan with redraw) will this do the same? as it will reduce the interest on the loan and will still give me access to funds (via the redraw)?

    Profile photo of bm17bm17
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    @bm17
    Join Date: 2010
    Post Count: 47
    Qlds007 wrote:
    Look have to say i disagree with the previous coments.

    I would also make sure the PPOR loan iis interest only at the same time and you should be good to go.

    Cheers

    Yours in Finance

     

    Richard,
    can you please outline why you said you would set up the PPOR with interest only. Given that it is non-deductible debt, isnt it a good move to reduce this? or will the linked offset account be effectively doing this?
    thanks,
    Blair

    Profile photo of goneosgoneos
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    @goneos
    Join Date: 2011
    Post Count: 20

    I've read all the above and I'm just going to reword what is already there. 

    If your PPOR will EVER (even if it's unlikely) be rented out, you should have the loan on IO and avoid paying any of it off.  This includes a redraw.  The same goes for your IP.  A 100% offset account goes against the PPOR as long as your living in it so you reduce the NON tax deductable interest.  DO NOT offset against your IO as this reduces your interest that IS deductabel (BAD).

    The reason to not pay off the PPOR becomes clear when you move out of it and buy something else.  You can then take your cash in the offsett with you as it is just savings.  You then have two large deductable loans and cash for the nice new house.  If you used a redraw instead of an offset it would have worked fine 'till now.  You would effectivly be increasing your loan by redrawing and it would not be for investment purposes (your PPOR is NOT and investment as far as the ATO is concerned).  The ATO look at the purpose of the debt.  The amount you redraw would attract non-deductable interest, whereas if you never paid it off ('cause it was in an offset) you didn't redraw.

    I know this is all a bit long winded but it might makes sense to some.  I also have an example of this that even my broker had never caught onto….

    We bought an IP for $100k.  We paid $10k deposit from our savings.  Borrowed 100k for the IP and paid ourselves back the $10k that had been used for the deposit.  At tax time our accountant then advised us that we could only deduct on 90% of the interest as $10k of the loan was not for the property but actually went in our pocket.  The next IP was bought with a deposit bond.  The fee was tax deductable and the 100% loan was all used to pay for the IP.  You live and you learn.

    Cheers,
    J

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hate to say Chappy is wrong.

    There is a massive difference between putting funds into an offset account and directly into the loan with the intension of redrawing on them especially if the redrawn funds were to be used for investment.

    Putting it simply do not do it as you will have contaminated the interest deduction.

    Hi Blair yes the net effect is exactly the same the big difference is that you protect the loan when it comes to claiming the interest as a deduction.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

    Profile photo of chappy1970chappy1970
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    @chappy1970
    Join Date: 2011
    Post Count: 23

    Richard no need to be sorry, that is the exact reason I joined this forum, to get sound advice on the right structure. 

    Looks like I need to have a new Savings account setup with a 100% offset facility against the PPOR loan.

    Thanks for the setting me on the right path.

    Chappy 

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Chappy

    Yes thats exactly what you need. Offset linked to the PPOR loan and you are home and hosed.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    0-40 Properties in a decade with an unencumbered value of over $35M. Email for a copy of my API article

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