Claimable Loans - Split loans w/ Offset ( Debt recycling)

Morning all,

Big fan of this site! i wish i found it a lot sooner.

Would love to get some input on my particular circumstance surrounding a recent loan refinance arrangement, specifically for Tax deductibility.

Firstly some background. We had sold up on a subdivision/development project & ended up purchasing 2x IP’s, one of which was going to be our eventual PPOR. The other IP was a little regretful – an Off-plan Apartment which took almost 2 years to settle – (live & learn!)


IP 1 – purchased for $600K (Loan – $540,000 - paid LMI @ 90% at the time)

IP 2 – purchased for $385,000


- Prior to refinancing I had approx 60K in Offset against the IP 1 ( 540K) & $40K in a Term deposit which was used as security for a Bank Guarantee deposit for IP2.

When It came time to refinancing IP1 for a PPOR loan – the val came in at $650K. Was advised to draw out an equity loan up to 90% LVR which was $45K ( since i already paid the LMI costs originally - the LMI fee on the increased value wasnt to much) to use as a "Deposit funds" for IP2, making sure the $40K Term Deposit security was distributed back into the PPOR Offset

Rather than the LOC path ( which is becoming tricky & expensive) according to my broker, i was advised to use split loans in the following arrangement for deductibility. I was a little dubious as i had only heard about using LOC for investments but this is what had eventuated.

PPOR Loans ( non Deductable) - all Interest Only

Split 1 - $450K with Offset
Split 2 - $50K

Investment Loans - All Interest Only

Split 1 – $40K ( with $40K in attached Offset )

( the some of the above 3 loans equated to the original 540K)

Equity Loan - $45K ( drew out the $650K val to 90% & paid a small fee - $2k)


When It came time settle IP2 ( a few month ago) – used the $45 equity loan to cover deposit & costs & bank loan to secure the remaining 90% - (approx. 345K)


Main concern & question on deductibility (involving Debt recycling concepts) is the following:

Can I use my Offset Account balance attached to my investment split ( was $40K but now approx. $30K now since ive bought some shares) to fund my monthly interest & all outgoing expenses for IP2 & claim the interest on this loan WHILE, depositing all rental income into my PPOR Offset Account?? Obviously main goal is to reduce the hefty $500K PPOR mortgage asap.

Is the above considered "Interest on Interest " & a big no-no?

Would appreciate any advice on the query above & if there could be a better way!

 

Get some personal tax advice. You could find the $45k loan interest not deductible and the LMI not deductible.
Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

Read up on capitalising interest
Tax Tip 16: Capitalising Interest Tax Tip 16: Capitalising Interest

 

Cheers TerryW - have an appointment for the 26th with a new Accountant here in QLD - hopefully get some sound advice! Hoping the correct structures will facilitate the next IP deal & one after that & so on...