Hi (new here)... Debt Recycling for IP Repair Work

Discussion in 'Introductions' started by MillsorNB, 7th Apr, 2020.

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  1. MillsorNB

    MillsorNB New Member

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    Hi I'm new here - a bit about me ... from Sydney, started investing 5 years ago, have 5 IPs, and have been quiet recently while going through life milestones, marriage, (almost) built PPOR, and first kid. I am now making a concerted effort to get back active and engaged to expand the portfolio with the aim of a passive income (with finer details being ironed out as part of being active again).

    My first post is a question regarding Debt Recycling, and any help here would be greatly appreciated.

    The situation is - one of our IP's needs repair work (not a renovation) and it is going to cost about 30k. I spoke to my mortgage broker and he said that we should use debt recycling and borrow the 30k, reduce my wife's tax rather than just take it out of the offset and pay for the repairs.

    Would someone mind breaking down how debt recycling would work for our situation?

    I'm not familiar with the concept and have been looking at videos and documentation, and still not getting it - most examples I've seen have been for reinvesting to generate income, whereas we are repairing the IP and already have the rental income.

    - My wife and I owe about 500k on our PPOR, which is worth about 1.2m
    - We have 120k in the offset and 40k in shares
    - The IP in question is the only one in my wife's name, she falls into a higher tax bracket, earns 200k p/y


    Thanks
     
    Last edited by a moderator: 8th Apr, 2020
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  2. shorty

    shorty Well-Known Member

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    Hope your mortgage broker is also an accountant.
     
    Last edited by a moderator: 8th Apr, 2020
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    You should seek tax advice about borrowing to pay for the repairs. This might involve the owner paying down their owner occ loan and reborrowing the same amount to use for the repairs.
     
    Last edited by a moderator: 8th Apr, 2020
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    confused :(

    ta

    rolf
     
  5. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    Hey there - your broker is using the word 'debt recycling' incorrectly. What he means is releasing equity from your home to fund the reno's - this is different from debt recycling.

    Debt recycling is when you wash the cash in your offset through the home-loan and then use the funds for investment purposes - which changes the loan purpose and increases deductions when done correctly.

    This still uses your cash, but in a way that increases deductions. Your debt level remains the same.

    Using equity increases your debt level, and all your cash remains untouched.

    If your wife's IP is the one getting the repairs, the deductions from debt recycling/equity release 'should' go to her, as it's based on loan purpose.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Brokers shouldn't be giving tax advice
     
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  7. geoffw

    geoffw Moderator Staff Member

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    Sorry Terry. The original post, and the thread title, was changed to change the term IO to IP at the request of the person posting. So your question about the use of the term IO wasn't relevant and was removed. I should have let you know.
     
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  8. MillsorNB

    MillsorNB New Member

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    Thanks Jess and Terry (also yes on my original post I mistakenly had IO rather than IP, latish night acronym confusion, post has been updated by a moderator)

    @Jess Peletier I believe that is what he meant, though haven't had a clear explanation and am not keen on pulling the trigger without the clarity (and additional advice). I'm trying to interpret what you wrote, sounds like we would be increasing our occ loan by the 30k, but this 30k becomes an investment loan which is carries the tax deduction benefits?

    @Terry_w noted on your point, and I am checking with my accountant that there is going to be a tax benefit before going ahead.
     
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  9. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    Yes, that's exactly right - just confirm with your tax guy. Make sure you create a new INV split, rather than just increasing the OO loan
     
  10. MillsorNB

    MillsorNB New Member

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    Thanks for the assistance Jess
     
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  11. MillsorNB

    MillsorNB New Member

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    FYI @Jess Peletier @Terry_w I spoke to my accountant (who is a property investor and CPA), he told me that it has to be done in a certain way to avoid penalties from the ATO, and initially to ensure that the loan is in a sub account of the occ home loan.
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Plus Member

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    Hope he is a tax agent or tax lawyer!

    That is only half correct. There won't be penalties if set up wrong, only if you claim expenses you are not entitled to. Ideally the loan on the main residence should be split into 2 loans, the $30k paid off and redrawn and the funds directly paid for the repairs - without any detours.