IP Loan structure

Discussion in 'Accounting & Tax' started by Sweetbob, 4th May, 2020.

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  1. Sweetbob

    Sweetbob Member

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    Hi All,

    I've been reading some of Terry's tax tips but I find myself in a slightly different situation to most. I have sought advice from accountant but not sure I received the correct advice.

    Asset summary
    • Property 1: Current PPOR with a $500,000 loan. Valuation is ~$700K.
    • Property 2 - proposal: Looking to buy a property for $1.7m
    • $400,000 cash sitting in an offset.
    Proposal
    • Property 2 will be an investment property for the first 3-5 years. I will then move in and it will become my PPOR.
    • At that point, Property 1 will then revert to being an investment property for the foreseeable future.
    Questions
    • What is the best way to structure the purchase of property 2 ? I was thinking it's better to use cash from offset to buy Property 2, rather than pay down Property 1 and borrowing against equity. In this case, Property 1 has a larger loan outstanding when it reverts to becoming an investment property in 3-5 years
    • If I redraw an additional $60k on property 1 taking the LVR to 80%, and use that cash to buy property 2, is the interest on that redraw tax deductible? Is it better to do this as a loan split, rather than mixing the loan?
    • I have seen terry refer to a LOC structure? What does this mean and does it apply in my case?

    Thanks

    Bob
     
  2. Jess Peletier

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

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    Hi Bob! Welcome to the forums :)

    1 - correct. If property 2 will definitely become your home, and prop 1 will be an INV, best to keep the debt on property 1 as high as possible.

    2 - if you redraw $60k from prop 1, the $60k should be deductible until you move into prop 2. Definitely split the loan. If you don't have 20% deposit for prop 2, it makes sense to do this so you avoid LMI on prop 2 purchase.

    3 - a LOC is a line of credit. There's not many situations where they makes sense in reality - similar outcomes be achieved in more cost effective ways.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    borrow 105% to buy property 2
     
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    A little complex

    really needs someone to run the models on what works best on the data that is representative of your resources, risk profile and goals

    Way too much flex to really advise on too much deets


    ta
    rolf
     
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  5. Sweetbob

    Sweetbob Member

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    I saw you mention this in the link below.

    How does one get a bank to accept a term deposit as security? Is this something that a big4 bank will generally do? Can I post shares and other assets as collateral?

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

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    It is a bit of a pain, a another strategy might be a related party loan.

    Generally hard to borrow against shares - if you have some consider taking financial and taxation advice on disposing of them v borrowing less for the new property. You might be able to incorporate it into a debt recycling strategy
     
  7. Shazz@

    [email protected] Well-Known Member

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    You sure you want to make property 2 an investment first? You lose your capital gain tax exemption by doing this.
    And if you keep property 1 as an investment for more than 6 years (from what I understand, could be wrong) after moving out, than you lose your capital gain tax exemption here as well.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    The property 2 would always be subject to CGT but as a percentage of time rented out over total ownership period so the % subject to CGT would be slowly reducing each day, plus costs such as interest incurred while living in it would help reduce any CGT. Depending on the circumstances it could be nil tax or close to it.
    Tax Tip 86: Don’t be so fearful of generating income from the main residence Tax Tip 86: Don’t be so fearful of generating income from the main residence

    If you go over the 6 years you won't lose the exemption in full, it would still help reduce CGT by a fair amount.

    See
    Tax Tip 109: CGT and Being absent from the main residence for more than 6 years Tax Tip 109: CGT and Being absent from the main residence for more than 6 years
     
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