Debt Recycling with IP's

Separate LOCs for each IP is much neater, especially when the time comes to apportion the interest. Can be quite a PITA if e.g. ownership ratios of the 2 IPs are different. There is also the issue of which property that single LOC is secured by, and the extra steps that you need to take when that security is sold.

It is very easy isn't it? I would wager that most property investors aren't savvy enough to discover things like this, and they're just trying to pay down the main IP loan so that it is as positively geared as possible.

 

I am surprised more people don't recycle. Most I speak to have never even contemplated it nor know that it is possible even.

 

I knew it existed but given I don't have an IP I never took the time to really understand it. It's only since looking more into shares that I thought about it and how it would also relate to IP's.

I must say though I do still find it odd the ATO allows it. For example say you own an IP that has 10k annual expenses and you debt recycle for 10 years creating a 100k LOC. Come tax time if done correctly your going to be showing 3 accounts:
1 - Equity split used to fund deposit and stamp duty + other costs. This relates to the direct purchasing of the property so understand it should be deductible.
2 - Loan property is secured against. Obvious this should be deductible.
3 - LOC which was used to pay for expenses. This could include property management fees from 10 years ago that you are still claiming as a deduction.

It just seems odd to me. It clearly works but would have the ATO officially said? You can claim interest on a loan of operating costs for an investment forever (well as long as it's held)?

 

Seems fine to me To quote the ATO:

 

basic tax law s 8-1 ITAA97.

But the ATO has made comments about debt recycling. They don't like it. So check with your tax advisor before doing this.