How I Financially Structured my Portfolio to Maximise Cash flow & Tax Deductions along the way.

All interest on your investment borrowings is tax deductible; regardless of the source you pay that interest from. If you visit the attached flow chart below you will also see one does not does not claim the interest component from where the IP interest is paid from.

As mentioned above though, this kind of structure will not suit everyone's individual circumstances and as such I strongly recommend you seek the advice from your chosen Finance Broker, Tax Professional and/or qualified Financial Advisor - preferably one with practical experience in creating wealth through investment property of their own.

 

I think it is great to hear different opinions, but I can see a few reasons why this strategy is not ideal. 2 main ones being:

1. You are paying down and mixing the loan A in the example.

If the PPOR will never be income producing then this won’t be an issue as the interest on the loan will never be claimed.


2. The use of the LOC itself

• LOC products are generally loans made ‘at call’. The lender can demand repayment with little notice. Limits can be suddenly cancelled or reduced.
• LOC products generally have a higher interest rate.
• LOC products generally don’t have offset accounts attached.

My preferred method would be (summary)

IO loan on the PPOR with a separate LOC split to be used for investment property deposits and expenses. Offset on the IO loan attached to the PPOR. Together with a separate IO loan secured on the IP.

The advantage with this set up is

• 30 year terms and not payable at demand,
• No mixing of the main loan, and
• not paying down debt, until needed.

 

Exactly @Terry_w . As stated all through this thread shown above, everyone's situation is different.

They need to run their situation, strategy proposed plan, goals & objectives past a Financial Strategist/IP savy mortgage broker and Tax Accountant to weigh up their options and then decide what's the best loan product/s and portfolio financial structure for them based on that advice.

One shoe shown here does not fit all.

 

What I am doing is creating a split loan for each IP expenses to keep it clean. With LOC, don't you need to divide the interest according to the expense proportions??

 

You do need to apportion it. But if all loans are IO (ie no extra deposits into the LOC) then it should be straight forward to work out. Ideally separate them, but not essential.

 

It will be heaps tedious if you use it for every small bit like bills, small repairs, cutting keys, etc etc?

 

Just a spreadsheet. You will need to keep records of these anyway for tax.

 

True, but I am kinda lazy. Just use the rental ledger from my PM.

 

Also, as interest is calculated daily, it is not a simple matter of just giving a percentage of use in the spreadsheet as some expenses happen earlier?

 

In that case a separate LOC for each property may be wise, but when claiming on your tax return you still need to show how much related for each expense - rates etc.

 

True

But you can work out the rough percentages on a reasonable basis. Perhaps work out each month how much borrowings related to each property and then apply a % to the interest charged.

 

Terry, I would assume in your preferred method above, you are paying monthly LOC interest from offset (linked to PPOR loan). All the incomings (rent, wages) are going into the same offset as well.

 

Yes - I might put up a more detailed version later of the way i do it.

 

Rixter, thanks for the share. I get your point that everyone's situation is different hence their setup could be different. In fact, in your chart you do mention that personal LOC could be saving account (e.g. offset)
This is how I see two ways discussed here.....please correct me if I am wrong..

• Personal LOC & Property costs LOC: Pay all the ongoing property costs except interest (e.g. repairs, rates, strata fees) from Property costs LOC. Pay off the interest of property costs LOC and all other investment loan's interest from Personal LOC. Personal LOC where all the rent,income goes in. Note this structure is not capitalizing the deductible interest on 'Property costs' LOC.

• IO loan with PPOR offset & split LOC for investment costs: Pay all the ongoing property costs except interest (e.g. repairs, rates, strata fees) from split LOC. Pay off the LOC interest and all other investment loans's interest from offset account. Offset against PPOR where all the rent,income goes in. Note this structure is not capitalizing the deductible interest on split LOC.

Most of the property investors get their PM to pay all their outgoings from rent and deposit the net rent in their account, hassle free & no administration required. You get EOFY statement from PM and all good. Above structures suggests to manage these costs (out of LOC) and receive the gross rent to make your money work harder while utilizing interest free days. Mind you your deduction amount remains the same. I could imagine this practice be beneficial as you have more & more IP but again it requires bit of administration.

Offset option provides lesser interest rate than LOC. I don't think it will stand cause there is no capitalized interest here but in Offset scenario ATO may argue that you are maximizing your deductions and offsetting the non deductible loan (PPOR). Tax scheme...

I've seen others performing the above strategy with credit card (rather than LOC). credit card used especially for Property investments costs and paid off every month using offset/personal LOC. You can also benefit from rewards program (if any). One has to be disciplined though using CC though and no mixing.

 

You are capitalising the Property Costs LOC interest and the IP loans interest into the Personal LOC but you are not claiming the Personal LOC interest.

 

Yes....that's what I meant Not capitalizing deductible interest but non deductible interest.

I get that you are capitalizing the interest on Personal LOC but fail to see benefits of it....as you are also putting all your income, rent in Personal LOC to offset it...

 

The main benefit is that it's used to increase one's cash flow. The cash flow increase is due to "only the interest components" on Expenses LOC and IP's are being deducted from Personal LOC/offset, as opposed to the total of ALL one's property portfolio expenses being paid from rent and/or disposable income.

 

Thanks for the post and the comments, very helpful and instructive!
now I have PPOR loan with NAB, $490K loan with $1m equity. so I need to ask NAB to top up the loan and setup an LOC acount / or split to 10 LOC accounts now, if I want to buy next IP?

 

Hi Terry, I was wondering about your scenario in the case of multiple IPs. I'm confused as to which account your rental income goes into. Is it into the offset on the IO loan attached to the PPOR, along with your wages/business income etc (as per your reply to S0805), or does the rent go into the separate LOC split (secured against the PPOR), from which rental expenses are also paid? The first option looks similar to Rixter's flow chart, whereas the second doesn't.
Does your strategy change with multiple IPs? Or do you pay all rental expenses out of the LOC and apportion interest accordingly?

My accountant/financial planner is saying "You can have an offset account against your home mortgage and put your salary in this account. As discussed, you cannot put the rent into this account".
I'm trying to sort out now whether he means I should have all rents and expenses going into and out of each separate IP, or whether I can have a separate LOC (secured against my PPOR) and apportion the interest against each IP accordingly.
One scenario at least temporarily reduces the interest payments against my PPOR, whereas the other doesn't, and seems overly complicated.

I am in the process of refinancing, and un-cross-collateralising, and trying to work out whether I need splits in each IP - one for existing IP mortgage, the remainder to 80% value to be used for ongoing expenses for that IP, or... something else.
There will either be one large amount that the bank is willing to offset against my PPOR, or else several smaller offsets against each IP. I suspect the latter is the correct answer, but I'm still unsure about how to conduct business in future, in terms of which payments go where etc.

Apologies for the long-winded post. Appreciate this forum very much!!

 

I haven't finishes writing my ideal loan structure up yet, but will finish it over the week end. Trying to make it detailed.

There is no legal basis for what your accountant/financial planner is saying. Rent can go into an offset account on the main residence - and should. If you are not doing this you will be paying more interest.