Forums / Getting Technical / Legal & Accounting / Negative Gearing – Tax Question

Viewing 6 posts - 1 through 6 (of 6 total)
  • Profile photo of Jackie768Jackie768
    Participant
    @jackie768
    Join Date: 2017
    Post Count: 3

    Hi Guys,

    I currently live in a prop worth 600K that I have paid off – I have not closed out the Loan.

    I am now wanting to buy a new prop to live in worth say 1 Million (as an example)

    I want to remortage the 600K property and borrow 400K for the new property and move into the new property.

    I then want to rent out the 600K property and have the loan as interest only. Can I then negatively gear the 600K property?

    Cheers

    Jackie

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Couple things:

    You won’t borrow 100% on the existing property – you need to retain some equity in there, ie 20% of the value if you want to avoid LMI so that would provide you with a maximum of $480,000.

    In reality however you cannot claim tax deductions on this loan if it’s being used as a deposit for your new personal residence – as its not for investment use.

    The ATO does not look at what property that the debt is attached to, but what the purpose of the funds are. ie in this example the 480k would have been used to purchase a new residence, so no deductibility.

    To try gain deductibility on the debt you could potentially either sell the property to a spouse or a trust you control to then allow you to re-gear the purpose and direct the funds for the deposit, but this will trigger stamp duty and potentially other tax events – best to speak with your accountant.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of Jackie768Jackie768
    Participant
    @jackie768
    Join Date: 2017
    Post Count: 3

    Thanks so much Corey on your invaluable advice – I really appreciate it.

    jackie

    Profile photo of Jackie768Jackie768
    Participant
    @jackie768
    Join Date: 2017
    Post Count: 3

    Hi Corey,

    I was told yesterday by someone (an accountant) that I can do this strategy ie negative gear if I have an Offset account for the 600K property (which I do). They said if I had a redraw facility I could not negative gear. I am quite sceptical of this given the feedback I have had so far.

    Does having the Offset account make a difference?

    Jackie

    Profile photo of ClaudioClaudio
    Participant
    @clockworkmio
    Join Date: 2015
    Post Count: 1

    Your accountant is correct. The funds parked in the offset account are effectively your own personal funds which can be used for whatever purpose you like. If you withdraw those funds (to say use as a deposit on your new home), the interest charged on the existing loan would still be deductible if the 600K property becomes an investment property.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    It depend son your definition of ‘paid off’

    There are 2 possibilities

    A. Loan balance of say $400,000 with $400,000 cash in the offset account

    B. Loan balance of $0 with an offset account (which offsets nothing)

    With Option A the property isn’t paid off, but the loan is fully offset. If the cash in the offset is you personal cash, and not borrowed, and the loan has never been redrawn then if you moved out you could claim the full interest on the $400k once the property is available for rent.

    With option B the property is actually paid off – but redrawing to use the money for a new main residence the interest will be a private expense and not deductible.

    The situation is unclear because you say ‘paid off’ but also you state you have an offset account – which would be impossible if it is paid off, but possible if the loan balance is zero (but unusual). You also say ‘remortgage’ which implies there is not mortgage and if there is no mortgage the loan would actually be paid off – but you couldn’t have an offset account on it if it was!

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

Viewing 6 posts - 1 through 6 (of 6 total)

You must be logged in to reply to this topic.