Buying with cash - Tax issues

Am considering buying houses in some regional towns 1.5hrs drive from CBD. Some of the properties require significant work which I can do, and indeed enjoy doing. The houses would not be considered habitable in original state. Was planning to use cash (yep, just plain Jane money in the bank) to buy the property, renovate, rent out, finance (borrow 80%), and use proceeds from financing to replenish savings and eventually use to purchase the next property. Buying with cash is easier in the first instance and eliminates any risk associated with getting finance ahead of settlement. Also, sourcing finance on properties that are not habitable can be very difficult. And paying cash can put you in a stronger negotiating position in other ways. Financing risk diminishes after settlement occurs when rehab is done and once a tenant is selected.

So, pay cash, and get the savings out by financing post settlement.

But this seems to raise a tax issue.

Assume purchase price is $200k, and I eventually approach bank to borrow $160k (80%, which I use to replenish savings account, and will eventually use cash funds for next purchase).

Is the $160k immediately tax deductible against the rent on the 1st rehabed house?

 

AFAIK none of the interest on your borrowings are tax deductible as the purpose is not for an investment.

 

I thought as much. So, alternatively, best to use established LOC rather than cash to fund purchase. Then use proceeds from refinancing house to pay down LOC. My understanding is that borrowing money to pay down tax deductible debt is in itself tax deductible.

 

Related party loans

 

Is this not just a single borrower replacing one $160k debt with another $160k debt? Much the same as changing banks to get a lower interest rate. One loan gets paid off from another new loan.

 

e.g. you set up a company, lend cash to the company on a written loan agreement - with mortgage - company meets terms of loan agreement. Later company refinances this loan with a bank and pays you out.

 

Not an accountant here
I think there is a better way
You set up a company or Trust and loan your cash to it.
Then do the works and refinance and pay back yourself

 

That would work. Thanks.