Hi,
I'm thinking to purchase a new investment property.
I still have 100k left on my PPOR mortgage and I have excess funds to do the redraw around 150k from my LOC Home Loan.
I borrowed this from Bank A.
My idea is to buy around 450k investment property, and borrow 20% deposit (to avoid mortgage insurance) from my LOC (from Bank A).
It turns out around 115k including stamp duty.
Thus, I would like to borrow this 115k from my 150k LOC. Variable rate.
The remaining 80% would be funded by another bank as a new home loan (call it Bank
.My question now:
1. During the tax time, can I claim the interest I paid for the 115k (20% deposit) from Bank A, as a borrowing cost?
2. If I can claim the interest as tax deduction, how do I prove this to ATO, especially if it is a variable rate. The rate can vary from one month to the other month. Thus, the exact amount is a bit hard to be calculated.
Thanks.
The interest on the $115K is deductible as the expenses were incurred to buy an income earning asset.
Try and separate the redraw funds into a second facility so it is nice and clean from a record keeping perspective. If you can do this there is no question, from a deductibility, ATO accountability perspective.
Your bank statement/s will verify your claims.
N.B. Not an accountant.
Unlimited, just to clarify that the 150K LOC is a totally separate facility and not part of a redraw or mixed with your personal borrowings ?
Assuming this is the case then sure draw 20% + acqusition costs from the investment line of credit (personally i prefer equity loans as they are charged at cheaper interest rates) and then take out a standalone interest only loan with a separate institution. There are some excellent investment products doing the rounds at the moment without annual fees etc depending on the loan amount and lvr.
In regards to how you claim the interest on the 150K LOC if you operate interest banking thru your lender you should be able to print off a statement covering the interest charged for the year and you merely add it to the interest charged on the interest only standalone facility on the new IP.
Of course before you proceed make sure you don't intend to buy another IP and end up using all of your LOC up as it is certainly easier to go to a higher lvr with a purchase rather than try and draw out equity at a later date.
Also as mentioned make sure your new LOC is totally separate to your current PPOR borrowings or you will end up contaminating the entire intere
Finally make sure you do not listen to your Bank / Banker if they tell you anything to the contrary.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Unlimited, just to clarify that the 150K LOC is a totally separate facility and not part of a redraw or mixed with your personal borrowings ?Assuming this is the case then sure draw 20% + acqusition costs from the investment line of credit (personally i prefer equity loans as they are charged at cheaper interest rates) and then take out a standalone interest only loan with a separate institution. There are some excellent investment products doing the rounds at the moment without annual fees etc depending on the loan amount and lvr.
In regards to how you claim the interest on the 150K LOC if you operate interest banking thru your lender you should be able to print off a statement covering the interest charged for the year and you merely add it to the interest charged on the interest only standalone facility on the new IP.
Of course before you proceed make sure you don't intend to buy another IP and end up using all of your LOC up as it is certainly easier to go to a higher lvr with a purchase rather than try and draw out equity at a later date.
Also as mentioned make sure your new LOC is totally separate to your current PPOR borrowings or you will end up contaminating the entire intere
Finally make sure you do not listen to your Bank / Banker if they tell you anything to the contrary.
Thanks for this.
The 150k is mixed together with the personal borrowing as well. This is Line of Credit.
In my opinion, what Derek said is correct, in terms of separating this 20% into a second facility.
But, I'm not sure whether my current loan provider will allow me to split the loans for this.
Is it common for the bank to split the loan easily (because the loan amount will be still the same(no change))?
Note that inside the 150k is my car loan, personal loan, etc.. The actual LOC is $200k. For my car & personal loan = 50k.
It leaves the balance of 150k unallocated funds that is free at the moment.
Thanks.
Hi Unlimited,
General idea is any costs to investments or business incomes are 100% tax deductible, however, you will need to consult your tax agent. Tax deductibility in PURPOSE not what the security is.
1) if the funds are current for Bank A is used as a redraw then you just need to keep records for your accountant, what was used for investment, eg (A LOC + BANK
a) Note I have seen accountany do % of the A LOC (eg 76% was for investment, etc), but I would recommend for simply sake (split the "credit"). This say split, LOC to 115k and 35k. This now ensure all of the "loan" 115k was used of investment use, and continue with your debt cycling with the remain 35k for your personal "non tax deductible" debt. Some lenders will allow you to adjust the loan facility without a review of credit as you a not increasing their risk, it depends on how your lender views NCCP.
b) your tax deduction is not the RATE (variable or fixed) but it is regarding the costs to hold the investment, eg the interest, depreciation etc. My understanding is the interest paid for the investment property is tax deductible, which is fine if it is variable.
If you don't split the loan then this is there is gets interesting. Say you made a principle reduction of $20,000. Who can argue you didn't reduce the investment component and only reduce the personal component (the remaining 35k, if drawn already for personal use or using debt recycling) hence it is reduced proportionally at 76%. The problem is then the redraw on this facility is useless, unless you redraw again of investment purposes, as you would increase your tax deductions (the loan balance) without the potential of increasing income, if it were done for personal use.
BTW I like your strategy.
1) maximise tax benefits
2) keeps properties separate
3) potential to capitalise with different lender specials
As this is an investment you may want to consider LMI, as you're increase you ROI as you use less of your own money, hence it may enable to purchase another property with the existing equity. We also have access to lender who do 90% no LMI for certain occupations.
Hi Unlimited,
I just noticed your last reply post that the LOC is $200k, probably a good idea to split the LOC, so the purposes are split. Looks like you have a great structure to build a large portfolio.
Unlimited, it will depend on with whom your loan is with as to whether you can create a second split.
Either way i would have used an equity loan rather than a LOC.
Link your offset account to the non deductible split.
If unsure get your Broker to do it for you. We do it all day long for our clients.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Sure Harvest.
Your explain is very detail. I always like the detail.
Sure Harvest wrote:b) your tax deduction is not the RATE (variable or fixed) but it is regarding the costs to hold the investment, eg the interest, depreciation etc. My understanding is the interest paid for the investment property is tax deductible, which is fine if it is variable.
About this quote, what I mean by variable is if the LOC is not separated (mixed) with personal loans, then the interest is very hard to calculate.
Eg. In July, rate 5.99.. In August to Sept 5.74… In Oct to Feb 5.49, etc…
My point is very hard to calculate the 115k when the rate is variable, and complicated for ATO to check this as well.
If it's fixed, then it's easy to calculate.
About 90% LMI, it's a great idea… But I think my serviceable will be taken into account too, isn't it?
Again, thanks for your information.
Don't mix personal and investment borrowings in the same loan. You will be able to apportion it easily enough to determine deductibility initially, but as you put more money in it will become a nightmare. Also any further deposits will be coming off the investment portion as well and this will result in more tax.
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
Yes your own serviceability will be taken into consideration on any new borrowing.
Make sure your Broker gets a couple of LMI quotes for you as the even though their are 2 main mortgage insurers the rates charged varies from lender to lender.
Building a property portfolio is more about the structure and set up rather than the bottom line interest rate.
This is the mistake many new investors make and they end up paying for it later.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Building a property portfolio is more about the structure and set up rather than the bottom line interest rate.
This is the mistake many new investors make and they end up paying for it later.
I couldn't agree more with what you said.
That's way I always try to plan ahead before I even start.
Thanks.
Terryw wrote:Don't mix personal and investment borrowings in the same loan. You will be able to apportion it easily enough to determine deductibility initially, but as you put more money in it will become a nightmare. Also any further deposits will be coming off the investment portion as well and this will result in more tax.It seems to split/separate the loan is the only best solution.
Hopefully my lender allows me to do this easily.
Thanks.
If not mate get your Broker to refinance the loan for you and structure it correctly from day 1.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
unlimited wrote:Terryw wrote:Don't mix personal and investment borrowings in the same loan. You will be able to apportion it easily enough to determine deductibility initially, but as you put more money in it will become a nightmare. Also any further deposits will be coming off the investment portion as well and this will result in more tax.It seems to split/separate the loan is the only best solution.
Hopefully my lender allows me to do this easily.
Thanks.
If they don't – there's plenty of other options out there.
Just do yourself a favour and work with someone that sets up these types of structures daily. An everyday branch banker is probably not going to understand what you're aiming to achieve.
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]
Certainly time to take one step back and get the structuring right (from tax perspective and future investments) so you can forward from there.
Even if you need to refinance to 'tidy things up' it will be worth it in the long run. Clean is good.
Jamie M wrote:If they don't – there's plenty of other options out there.
Just do yourself a favour and work with someone that sets up these types of structures daily. An everyday branch banker is probably not going to understand what you're aiming to achieve.
Hi Jamie M,
Can you please advise about other types/structures for this, that you know/aware?
Thanks.
I think Jamie has already answered this you need an equity loan over a LOC.
A Banker will give you 101 reasons why you should cross collateralize the securities and how it is good for you (or if not you for the Bank) and then if that doesn't work will tell you to use a redraw as there is no real issue and the ATO will never know if you claim a deduction.
Professional unbiased advice is the only way to go.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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