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IP Deposit - Tax deductibility

Discussion in 'Property Finance' started by Xsi, 30th Sep, 2016.

  1. Xsi

    Xsi Member

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    I have read a thread on this a while back but cant seem to find it now. Here is what am trying to do-

    Lets us say I need 200k as deposit for my next IP purchase, normally I would just use equity in another home to make the entire 200k tax deductible. Currently I have only 100k of equity access, but another 100k sitting in an offset account. If I used the 100k in the offset account from my PPOR loan, it would be the same as using cash and that 100k would not be tax deductible going forward. How do I structure it to ensure tax deductibility of that 100k?

    Thanks.
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Pay the 100k down on your home loan, then you have 200k equity to access.

    Example
    Home worth $500K and have $100k cash.
    Loan is $300K.
    At 80% you could go up to $400k and take $100k equity out and use your $100k cash as a combined $200k deposit on next property.

    OR
    Pay loan down to $200k using the $100k cash.
    At 80% go up to $400K, thereby $200k equity out to use as a deposit on next property .

    Make sense?

    Make sure you discuss it with a broker before you do it. Don't get trapped into putting your cash in then finding out you don't qualify with any good banks to get equity out.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    pay down the non deductible debt, split and reborrow.

    If not enough time borrow off a 3rd party.

    I have written a tax tip on this titled something like "borrow 105% of your first property" - which could apply to your situation.
     
  4. Xsi

    Xsi Member

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    DT- My PPOR is already maxed out. So no further equity release. The loan split having the offset is already used to purchase of IP1, so I will get tax deductability for the 100k for IP1 once I take the funds in offset for purchase of IP2. I found the thread posted by Terry on this topic now. Looks like my option is to use 100k from offset and convert to a term deposit with new lender. Get a loan against the term deposit to fund IP2 purchase and that way the 100k becomes tax deductible. Eventually when equity growth happens(hopefully), I can swap the term deposit for equity release for new loan. Only issue being that I find it strange to pay interest on my own funds! Having said that, this is the only way I can think of to maintain tax deductability for new loan into the future.
     
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  5. Perthguy

    Perthguy Well-Known Member

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    Sounds about right. There have been a few threads on this:-

    Cash secured loan

    Tax Tip 60: Never use cash to invest

    Tax Tip 61: How to borrow 105% on your first purchase

    Deposit for loan
     
    House likes this.
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It really doesn't need to be that complex - just take the $100k from your offset, and pay it into the PPOR loan. Split the loan so you now have 2 loans attached to your PPOR - one of them will be an undrawn split for $100k. Use this for your deposit and it will be deductible.

    Which lender are you with? How easy this is will depend on your lender but is basically using the redraw on the loan. No new application should be necessary.
     
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  7. Xsi

    Xsi Member

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    Jess, unfortunately it is a bit more complex in my case. Every split I have in PPOR loan is directly linked to a specific IP purchase (ie deposit) and the loan is fully maxed out. In effect I currently have no non tax deductable debt in the PPOR loan. Hence I think the term deposit loan seems to be my only option.My PPOR is with AMP.
     
  8. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Oh I see - that's great! :)

    In your case the term deposit is the best bet for deductibility, BUT it's expensive to maintain and is not a good long term option - you'll be gaining maybe 2.5% interest on the TD, paying tax on it, and also paying 4% on the home loan. It's expensive to hold this structure, so run your numbers first.
     
  9. tobe

    tobe Well-Known Member

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    If there's no ppor debt and no available equity use cash for the deposit.

    Great problem to have btw.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I wouldn't want to use a term deposit as security in situations like this - it will just cost you money with possibly no tax benefit.
     
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