Hi,
Im in my 20's and i bought an IP from a family friend for $290k last year ($240k loan). I didn't do enough research on negative gearing and tax deductions (I know my own fault). I did my calculations and i figured i could pay the loan off in 7-10 years if i plowed all my money into it and rented it out, i could own it outright pretty soon. Currently paying Interestand principle.
I didn't get an offset account and have been paying the extra directly into the loan. Now that i have been doing some internet research i wanted to negatively gear the IP but have found that the rental income is about $200 over the interest payments per month, so it wouldn't be possible. I also just found out that even if i redrew my the extra money, i wouldn't be able to claim the interest on the amount i redrew, same for refinancing.
Now I dont know what to do. should i just keep trying to pay off the loan (and pay tax on the rental income) or switch to interest only to try and claim the little amount i can negatively gear for the interest only period (i think its 5 year) then pay off the loan? I know i have massively stuffed up but any advice would be greatly appreciated. Is there some way i can increase the taxable deductions of the loan?
Don't worry too much. That means you are making money which is not a bad thing. Increasing the tax deductions usually means increasing expenses which means forking out more money.
Why not switch to IO now and get an offset and then look at buying another one. The next one could be negatively geared which will offset the income on the first – but don't just buy a property to save tax, make sure it is one that will make you money.
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 Paul,
Most people would suggest yours is a good problem to have. As Terry mentioned, investing in property to save tax should not be the sole reason you do it.
Not much you can do about the extra repayments you made in terms of claiming interest for the current property, but you may be able to use any gained equity in the future for a new investment which will be deductible.
Cheers
Tom
Hi Paul
Do you have any other non-deductible debt like a PPOR mortgage or car/personal loans? If so, then best to pay down these debts before paying down a deductible IP debt.
If not, then I'd still probably opt for IO with an offset over principle and interest because it provides flexibility.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Paul,
Exactly why did you buy this property?
Wouldn’t Paul still be able to claim the full amount of redraw, as long it was used to purchase another investment property? Different story if he was to use it to buy his PPOR. He hasn’t said what he would be using the money for.
That is correct Paul – if redraw is for investment purposes the interest would be deductible.
Thanks for the feedback everyone.
i was actually planning on using the redraw for a wedding.
Derek, i bought the property because a family friend was selling it for under market value for personal reasons. i bought it for $250k and its worth close to $300k. i've only had it for a year an a half.
I think i'll switch it over to IO with an offset for the principle.
Thanks again guys
Gotta love high quality problems.
Hi Paul,
While you may have initially bought the property 'because a friend offered it to you" I suspect there was another underlying reason you bought the property.
For example was it to generate rental income or was it to buy an appreciating asset – both of which, in turn, will lead to a net increase in your wealth position. Does that sound about right?
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