Deductions with IP offset and extra cash

I understand this topic has been discussed a number of times in here, and I have gone through the fantastic tips and replies on this. But still not 100% sure about situations where there is extra cash in hand and what to do about it with IP offset accounts.

Scenario:

PPOR : Loan A: 320K OO loan with IO, offset A with 320K, so paying no non-deductible interest.
PPOR equity: Loan B: split 32K IP loan with IO, just approved and the bank put the 32K into its corresponding offset B.

IP (worth 350K): Loan C: 350K * 80% = 280K. Remaining 20% deposit = 70K.

Say I have got 70K cash in hand, does it make a difference if I use all my cash for the deposit, or to exhaust loan B of 32K (or more accurately, offset B) plus cash in hand of 38K?

This seems really confusing to me. A moment ago I thought I understood it clearly, the next minute I am confused again. The ideas I received from other posts are:

1: Use borrowed money to invest to allow for tax benefits
2: Don't use cash to invest
3: Don't use offset account to invest cause its equivalent to cash

Is there a way to maximise both cash flow and tax deduction at the same time?

 

Yes it makes a difference.

If you are the owner of the owner occ and the investment then there is no immediate tax difference. But there will be future tax differences if you need to use your money.

If the ownership structure is different then there are different tax effects. e.g. one property might be jointly owned with a spouse so using cash could result in lower tax deductions for this and higher tax deductions for another property.

 

Hi Terry, thanks for this. Considering the two cases below:

32K IP loan with offset, 70K cash, 70K deposit needed for an IP.

1: Don't touch the 32K IP loan, use 70K cash for the deposit.

Nothing deductible in this case, right?

2: Use 32K IP loan (offset) to fund part of the IP deposit, use 38K of cash to fund the remaining.

32K IP loan deductible, but doesn't make sense cause I am still losing money on this while I have another 32K cash sitting idle.

3. Use 32K IP loan (offset) to fund part of the IP deposit, use 38K of cash to fund the remaining deposit, put the remaining 32K cash back into IP loan offset to avoid interest. Six months later, take the 32K cash out of offset and pay for another IP.

Would the 32K be tax deductible at this stage? They were my cash, but used for investment.

 

1. yes
2. You wouldn't be losing money because you could put the other cash in the next offset account.
3. no.

 

Thanks Terry.

Regarding case 2, if I withdraw the 32K from loan B (offset B) for the IP deposit, can I direct future rental income to it so as to reduce interest while still keeping the remaining interest incurred on loan B deductible? Does this cause any mixing of the loan? Or should I direct rental incomes to loan C and always leaves loan B charging full interest on the 32K?

I am asking because loan B has higher interest rate than loan C. Many thanks for your help.

 

Yes that would be mixing the loan. Direct any rental income into an offset account which contains no borrowed money.

 

Thanks Terry. I seem to be confused even more. From your suggestions, I concluded that, for loan B of 32K, if I take the offset money out for investment, I will not be able to put any money back into it while maintaining its tax deductibility on interests.

1: I can't put my own cash in as this will make its interest non-deductible when I withdraw the money in six months time for another IP.

2: I can't put rental income into it as this will be mixing the loan.

What do I do about it? Do I just leave the loan unpaid and keep paying interest on it, forever?

 

If you borrow and park money in an offset account this will be borrowed money. So puting rent into this now will be the same as paying off a loan. If you withdraw from this then you will be mixing.

Why not just set up another offset on the main loan for the purchase?

 

Thanks Terry.
Do you mean offset account on Loan C? yes it has an offset account. Would it be better if the rent goes into that offset?

 

Yes