Help with financial structures onoffset account/owner-occupied property and IP

Hi all, thanks for checking the thread and trying to help.

Facts:
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Purchased a home A for 400K a year ago, paid 20% = 80K, left 80% = 320K in the offset account associated with loan a (IO), so paying no interest at the moment.

Have another 100K cash in hand, so the total usable cash is 320K + 100K = 420K for investment.

Now planning to purchase an IP B, for around 450K.

Do not plan to pay off home A as we may change it into an IP in the future.
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Questions:
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What is the best strategy to purchase IP B, from the tax perspective?
Is there a way to make the cost of acquiring IP B 100% deductible, without affecting the deductible perspective of home A?


What I can think of: (May be stupid )

1.
purchase IP B using the 100K cash in hand, get a new loan b for IP B

Analysis: simple, but the 100K deposit will not be tax deductible.

2.
purchase IP B using 100K cash from the offset account, get a new loan b from IP B

Analysis: seems the same with 1, apparently still non-deductible.

3.
Pay 100K from offset into loan a, and redraw it as deposit for IP B.

Analysis: IP B may be 100% deductible, 20% from loan a, 80% from loan b. But in the future when we turn home A into IP, the deductible amount will be affected as we have paid 100K into the loan.
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Would greatly appreciate anyone's opinion on this, even if it's an answer of "not possible".

 

who owns home A? You or you and spouse?

 

Thanks Terry, both my spouse and I own home A, and we plan to own the IP B the same. Does the ownership affect tax deductions? Many thanks.

 

Yes it does. I was thinking of lending to each other, but that won't work unless you maintain separate accounts.

For some other ideas Check out
Tax Tip 61: How to borrow 105% on your first purchase

 

Hi Terry, thanks very much for this. According to your tax tip 61, should I put the 100K cash currently in hand into a term deposit and borrow against it to fund the 20%(or 25% including various fees) of IP B, while setting up loan b for the remaining 80%? Would this config make the cost to IP B 105% deductible while not affecting the perspective of our own home A at all?

 

I am not saying you should, but you could do that.

It would result in more interest being paid on the PPOR though and this interest would not be deductible. at the same time the interest on the term deposit would be taxable income and the interest rate would be much lower.

A better option (for you) may be to borrow from parents/relatives and keep your money where it is.

 

Hi Terry, thanks for the reply.

I don't owe money on my ppor considering the 20% deposit and 80% offset. So I suppose if I don't touch it, it will keep as it is.

What I asked was about the extra cash of 100K in hand (currently in a saving account attracting 3.5% pa but also marginal tax rate). If I put this amount into a term deposit, and borrow against it to fund the 20% + 5% cost of IP B, will this 100K become fully tax deductible? If the answer is yes, I believe this would be the best scenario I can get out of my current situation.

Much appreciated for your kind help.

 

Oh, in that case then yes, there is no real downside as the rate would be similar anyway.

 

Very, very simple to turn the funds in the offset account into a deposit for the next IP in a tax deductible manner. Whilst easy, this may not be the best strategic approach.

The real question is what else are you planning for the longer term? You've indicated that the existing home could become an IP, do you expect to purchase another home to live in? If this is the case, then possibly using equity (over and above the existing loan on your home) might be a better approach. Actual property value and affordability circumstances would also need to be considered here.

Using your cash (your savings) as an investment property deposit isn't the best approach for buying an IP unless absolutely necessary. It reduces the cash on hand which is more effectively used for non-deductible purchases.

It would be worthwhile consulting a broker to get a bigger picture of your borrowing capacity and equity position.

 

You never know, you might have had some growth on that PPOR too. If so you would tap into that equity to fund the deposit.

 

Hi Peter, thanks for your kind reply. I am really interested to know a bit more on other available approaches to turn funds in the offset account into tax deductible. Much appreciated for your kind help.

Our PPOR may have not gained much equity yet since we've only built it a year and half ago. I would definitely consider taking equity for investment if it is available.

 

Fairly straight forward, it's just that using equity tends to be better than using savings for investment purposes. It really just depends on equity and serviceability.

You're welcome to give me a call if you like to discuss specifics. Half my family also lives in Geelong so I'm out that way fairly reguarly.

 

Hi Terry, thanks very much for this, exactly what I wanted to be sure of. Really appreciated.