Deduction for fully paid Property

Hi,

I am trying to find out if it is possible to do the following:

I am having an IP with a split IO of which 1 part is the original amount I borrowed when bought as my primary residence (Interest used as deduction) and the second part is equity I got out when I refinanced. The money sits in an offset account.

Scenario 1:
Use the second part of the loan to buy another IP outright. Am i able to use the interest charged for the second part of the loan as deduction? I think it shouldn't matter that there is no real mortgage as I still borrowed money to buy the property but I am not an accountant...

This one is just out of curiosity: would I be able to reverse mortgage the new IP that was bought outright and use the money as a deposit for another IP?

Scenario 2:
Use the second part of the loan as a deposit and get another loan, let's say 20% + 80% would I be able to use the interest on both these loans as a deduction making 100% of the purchase price deductible?

I am curios what you think. Is this a standard procedure what people do OR am I missing something.

thanks

tomas

 

1. It will depend on the circumstances, but if you do it correctly the interest would be deductible.
Deductibility depends on the use to which borrowed money is put and not the security for the loan.

2. yes, if done properly

 

Thanks Terry. So in theory it's all possible. Time to implement.

 

Its how you implement the use of the borrowed money that will be critical. Drawing from the offset isnt the correct manner to do this. It would be better if the loan split has redraw and the lender allws you to repay the offset cash then draw it directly to buy the IP.

 

Hi Paul,

thanks for you reply. So you think for tax purposes it's better to repay the split from the offset (almost 100%) and then use the redraw to pay for the IP OR deposit for an IP. Hmmm that kind of makes sense... then you'd have a proof with the correct account number that the money was used to obtain an asset and hence why you are claiming the interest on that account as deduction.

thanks

tomas

 

If you redraw to pay for the property or the deposit you would be borrowing to acquire it and the interest would be deductible if available for rent.