Forums / Getting Technical / Finance / First IP loan structure

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  • Profile photo of adam.padam.p
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    @adam.p
    Join Date: 2012
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    Thanks Tom.

    I'll talk to the loan manager to arrange the above. The last time we spoke, he seems to combine LOAN1 ($218K) and LOAN2($50K), but I haven't agree to anything yet.

    PLC wrote:

    *offset can be linked to either account or both, but should be linked to at least one.

    Do you mean 1 Offset account can be linked to more than 2 loans?

    Profile photo of Jamie MooreJamie Moore
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    You can only link one offset to one loan.

    Cheers

    Jamie

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    Profile photo of adam.padam.p
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    @adam.p
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    Combining Tom's and Jamie's comment, I understand the following:

    – I need to have 2 x offset accounts

    – 1 x Offset Account for LOAN 2

    – 1 x Offset Account for LOAN 3

    – If I only have 1 Offset Account on LOAN 3, I'll have to ASAP paying off LOAN 2? In this case, it makes more sense to have offset account on LOAN 3 since it has more debt.

    Then more questions to ask. Will it be more beneficial if I do the following:

    Using Security A (PPOR > IP):

    Loan 1: IO, with offset, amount – $218K

    Loan 2: (separate split from the above): IO, with offset, amount – $50K

    Using Security B (New PPOR):

    Loan 3: IO, with offset, amount – $300K

    LOAN 1, it's IO, with offset. It gives me:

    – a choice whether to reduce interest paid on this loan or on another loan

    – Offset account will mainly have balance of $0.00

    – I just want to have an option in the future if I want to reduce interest paid but still have money to be withdrawn

    LOAN 2. It's IO with Offset. It gives me:

    – As long I have $50K in the offset, I don't have to pay interest

    – If in the future I need to buy a new IP, I can withdraw this $50K and claim is as Tax Deductable portion? Is this still valid? Since I've used this $50K portion to buy new PPOR but later top it up to be withdrawn to buy the next IP?

    LOAN 3. It's IO with Offset. It gives me: 

    – Since money is sitting in Offset, it makes no different paying Principal early. Assuming I won't withdraw unnecessarily from my offset account.

    – In the future, if I want to convert this PPOR into IP, I can keep full $300K as tax deductible portion

    I may have miss something. It seems loan type of IO with offsets is the best scenario for most situation. 

    Did I miss:

    – The total setup/running cost to have IO and offsets are too expensive?

    – Same lender will not allow me to do it?

    – Other thing?

    Profile photo of PLCPLC
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    @plc
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    Adam,

    When you have non deductible debt such as a PPOR, it is advisable to put any excess money into an offset account linked to it. In your situation above, really no need for the offset in Loan 1.

    With your comments under loan 2, it doesn't matter what you use the funds for when withdrawing the 50K in the offset. It's cash and has no effect on the actual loan, whose borrowed funds were originally used for the new PPOR (personal use). Original non deductible rules apply.

    However in saying that, if you do change the new PPOR to an IP in the future, then the 50K will be deductible debt, same as  what you mentioned in the comments under Loan 3.

    In regards to offset, it doesn't matter if money is split over multiple offset accounts or one single one, you still pay the same amount of interest overall. Most people would go with the one offset but multiple accounts do have their place depending on circumstances.

    Dependent on lender you can set up multiple loans and offsets.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of TheFinanceShopTheFinanceShop
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    Make sure you go with a lender that can handle more than 2 offset accounts such as a Westpac instead of a lender who cannot such as ING.

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    Profile photo of adam.padam.p
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    @adam.p
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    I've spoken to ANZ.

    They agree with LOAN1, LOAN2, LOAN3 as I mentioned before, IO with/without offset.

    They can do multiple offset accounts but they only give 1 free. For every extra offset accounts I need to pay $10 / month.

    They also allow me to switch which loan to be linked to which offset account in the future for free. So for now, I linked the only offset account to the loan with most non-deductible debt, which my PPOR.

    Thanks for everyone comments.

    Profile photo of TheFinanceShopTheFinanceShop
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    Good work. That is correct linking the offset to the 'bad debt' being the PPOR. 

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    Profile photo of adam.padam.p
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    @adam.p
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    In the future, if I take out new LOAN4 (secured against new PPOR), with the purpose of paying of LOAN2 (secured againts IP), does this LOAN 4 become tax-deductible?

    Profile photo of Richard TaylorRichard Taylor
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    As long as the purpose of the loan is for investment irrespective of the security it is deductible.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    Profile photo of stevecommathestevecommathe
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    mmmm very intruiging. this gives me a lot to think about!

    Profile photo of PLCPLC
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    As Richard pointed out Adam, its the purpose of the loan that is the determining factor.

    In you case, the purpose of the funds is to pay out a loan which was used for deposit and costs for the new PPOR (LOAN 2), that is a personal nature and therefore not deductible. All you would be doing is shifting debt around.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of cham_chuancham_chuan
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    Hi, guys
    I read all the questions and answer
    And I have a maybe silly question
    For tax purpose
    Can Adam refinance his current PPOR and make the loan look bigger

    315k*80%=252k or even more… Then Adam will have cash in hand to buy his new PPOR
    And from that time Adam starting to use his old PPOR as new IP
    So the 2 loans are very clear and also he will be able to claim more tax on his IP ?

    Sorry if the question sound silly… I’m very new to this

    Profile photo of TerrywTerryw
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    cham_chuan wrote:
    Hi, guys I read all the questions and answer And I have a maybe silly question For tax purpose Can Adam refinance his current PPOR and make the loan look bigger 315k*80%=252k or even more… Then Adam will have cash in hand to buy his new PPOR And from that time Adam starting to use his old PPOR as new IP So the 2 loans are very clear and also he will be able to claim more tax on his IP ? Sorry if the question sound silly… I'm very new to this

    He could do that but it wouldn't change the tax positon.

    The extra money borrowed would be for private expenses and the itnerest on this would not be deductible.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of cham_chuancham_chuan
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    Terry
    My question is
    How would ato know what Adam used the money for
    When we borrow money from the bank for a property as a PPOR, ato really don’t care what we do with the money(I assume?)
    So, my imagination is… Before Adam buy his new PPOR, refinance first and make is owing bigger…
    Can this work?

    Profile photo of TerrywTerryw
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    I cannot advise on defrauding the tax office.

    One way they can easliy find out is through an audit. Ask you to produce bank statements.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of PLCPLC
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    @plc
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    Exactly Terry.

    It's not worth the risk of potential fines and/or jail time to save some dollars.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of adam.padam.p
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    @adam.p
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    Continuing with my new situation….

    In summary from old post, I was refinancing to convert PPOR to IP. I ended up with:

    1 x IP with:

    LOAN 1 – Tax Deductible
    LOAN 2 – Non-Tax Deductible because I used it to buy my PPOR

    1 x PPOR with:

    LOAN 3 – Non-Tax Deductible because it is used to buy my PPOR

    Now, I’m looking to buy another IP. So the questions:

    Can I now claim LOAN 2 as tax deductible? How do I link this LOAN 2 to say its purpose now is to buy another IP?

    If the above is not possible, how do I convert LOAN 2 so it can be tax deductible?

    • This reply was modified 5 years, 1 month ago by Profile photo of adam.p adam.p. Reason: Terrible formatting
    Profile photo of PLCPLC
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    @plc
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    Continuing with my new situation….

    In summary from old post, I was refinancing to convert PPOR to IP. I ended up with:

    1 x IP with:

    LOAN 1 – Tax Deductible
    LOAN 2 – Non-Tax Deductible because I used it to buy my PPOR

    1 x PPOR with:

    LOAN 3 – Non-Tax Deductible because it is used to buy my PPOR

    Now, I’m looking to buy another IP. So the questions:

    Can I now claim LOAN 2 as tax deductible? How do I link this LOAN 2 to say its purpose now is to buy another IP?

    If the above is not possible, how do I convert LOAN 2 so it can be tax deductible?

    Adam,

    If you are still going to live in your PPOR then that LOAN 2 is not going to be deductible. If you made it into an IP then it will.

    If you’re looking to buy another IP, what you can try dependent on equity position is take out a loan against either property to fund deposit + costs for new IP. That would be deductible.

    If you don’t have equity but instead have cash funds you want to use, then you can pay down some of the non-deductible loans, and then take out a separate loan as above for deposit + costs for new IP for same deductible result.

    Just needs to be structured correctly. As your situation isn’t totally clear in your post best to see a decent broker who can go through it all with you and get it done right.

    Cheers

    Tom

    • This reply was modified 5 years, 1 month ago by Profile photo of PLC PLC.

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    Profile photo of adam.padam.p
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    @adam.p
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    Hi Tom,

    You assumed correct. I’ll be staying at current PPOR, where LOAN 2 is used. I’m buying another IP.

    I’m trying to divert LOAN 2 to buy another IP.

    From your quote:

    If you don’t have equity but instead have cash funds you want to use, then you can pay down some of the non-deductible loans, and then take out a separate loan as above for deposit + costs for new IP for same deductible result.

    I was thinking along with what you said. I have cash funds that can paid off LOAN 2. If I paid off LOAN 2 and re-finance at the same time with the same lender and with the same amount with LOAN 2, would this be considered valid for tax purposes?

    Thanks

    Adam

    Profile photo of PLCPLC
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    @plc
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    I was thinking along with what you said. I have cash funds that can paid off LOAN 2. If I paid off LOAN 2 and re-finance at the same time with the same lender and with the same amount with LOAN 2, would this be considered valid for tax purposes?

    As long as the new loan was to be used towards the new IP purchase then yes, it would be deductible. However as you have different loans everywhere, you need to ensure the whole loan structure is setup correctly if refinancing.

    Cheers

    Tom

    • This reply was modified 5 years, 1 month ago by Profile photo of PLC PLC.

    PLC | Phoenix Loan Consulting
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