Investing entirely with equity release + own money

Hello, hope everyone is doing well. Curious on which path I should go with buying an investment property.

Option A: I've released 400k equity from my PPOR. I buy a property for 450k putting the other 50k of my own money in. Would the ATO view the 400k as deductible debt?

Option B: I've released 100k equity from my PPOR. I take a second loan for the remaining 350k and buy a property for 450k.

Apart from the tax deductibility issue are there any other pros and cons of either option A or B?

Thank you in advance for all your help.

 

It could depending on how you structure it.

have you heard of debt recycling?

 

Yep that's what I'm trying to get at. Would the ATO allow me to convert the non deductible debt to deductible in option 1?

 

They don't make the laws. If you borrow to invest the interest will be deductible if the investment produces income. It doesn't matter what the security for the loan is.

And debt recycling isn't just borrowing to invest, it is converting the non-deductible debt into deductible.

 

If you use cash to buy an investment property you own: you cannot refinance that property later on to access the cash and use it privately.

So option 2 will give you more tax deductions. If you have surplus cash (say $50k) and you have paid off your mortgage you can place that excess cash into a mortgage offset account.

 

Yes. My PPOR. Which is where the equity is pulled out of.

 

Agreed. With option 1, would the ATO view the 400k as being contaminated with my own monies and hence perhaps not view the 400k as deductible? I know this is a problem when withdrawing equity and transferring it through cash filled accounts and then dropping it in a income producing asset. I was wondering if it would be a problem here.

 

It depends on how you structure things and transact. You should borrow under a separate loan and make sure there are no detours with the borrowed money.

 

Hi @Terry_w, just to get some clarification. If the place had have been an investment and there was the 400k equity release, would that be tax deductible straight away if that went into a seperate offset account with no other money in it?

then with the 50k, how does this become tax deductible?

 

no. you would have to invest it to produce income for the interest to be deductible.

 

Yes, sorry I meant once it’s used to purchase an IP.

so how do you make the $50k cash contribution deductible also?

 

What costs have you incurred in relation to that?

 

I guess my question is whether there is a way to make that tax deductible too by putting into an existing loan and redrawing for IP purchase perhaps? I know you have a tip talking about using redraw for IP, but not sure if that would apply in this instance?

 

Debt recycling?