loan purpose and tax deductability

Hi,
trying to get hold of accountant today and he's unavailable.
I have a LOC loan that was originally made for investment purposes (and therefore tax deductable) that I completely paid off but it was still there. I then purchased two more investment houses and drew back down this loan (but I could have spent the lot at the casino and it still would be tax deductable I was just ahead in my payments) The loan is tax deductable untill paid off I have been told. I now have to pay for a boat. Can i draw out of the house that I used this loan for the deposit and renovations and pay myself back, and then go and buy the boat from this deductable loan, and have my deductable boat? (I think I know the answer but it's worth a try)

 

If you drew down to use for property investing the interest may be deductible. If you draw down on a loan to buy a boat the interest won't be deductible unless the boat relates to a business perhaps. You will also have a mixed purpose loan.

 

I'm confused by the comment : but I could have spent the lot at the casino and it still would be tax deductable I was just ahead in my payments

Interest is not incurred if you are ahead and draw savings. The use of borrowed money dictates its deductibility. Draw a loan and use the $$ in the casino and is often not deductible : Tax Ruling IT 2655 draws the distinction between a punt and a business of gambling.

The loan facility or its security isnt a deductible purpose. The USE of each borrowing needs to be tested

 

Yeah I guessed as much. So I would probably be better off just getting a loan for the boat amount out of the PPOR then?

 

Or rent one when you need

My theory of three Fs remains strong to this day. If it flys, floats or f^#ks its cheaper to rent than buy

 

so the original loan that was borrowed for the purpose of investmen, i was ahead in repayments. like an offset. i can draw back down and whatever interest is being charged is deductable because the purpose of the loan was deductable. thats right isn't it? everyone tells me it is. I should have left it there for non deductable expenses as i have plenty of equity. oh well. ill just have to smash it quickly

 

Redrawing is reborrowing, when you take that out and use it for non-investment purposes you contaminate the loan.

You would be better to offset a home loan or something instead of paying down an LOC as the interest is tax deductible WHEN the money is used for investment only, can use it to pay rates and bills relating to an investment property instead of using your own cash though.

 

No. Deductibility of the interest depends on what the borrowed money is used for.
Taking money from a loan is borrowing afresh. Even if it is done by redraw.

Everyone telling you that interest is deductible probably not qualified to tell you that.

 

Think of it like a credit card, as that is essentially what it is, except using equity to secure it.

If you were to use the credit card solely for investment related expenses then you can deduct all the interest, charges and fees off your taxable income.

If you start buying groceries using it, you're no longer using it for investment purposes only and you won't be able to determine what interest accrued is attributed to what part of the debt and therefore claiming interest will be challenging.

 

Not a professional, and don't quote me on this, but I feel the same as @Archaon . I would put extra funds into an offset linked to the loan rather than pay the loan down. As of my humble opinion, when you have more money in the offset account, you pay less interest, when you take money from offset to buy things, you pay more interest, but either case the interest is deductible.

 

From the sounds of it you have really come up with a bad situation.

Why did you pay down tax deductible debt?

 

Not quite.

First the original loan purpose and use must be determined. Thats what determines deductibility. And deductibility cant be recreated or increased later unless further improvements are made to the property.

When you credit extra $$ into a offset the underlying loan in unaffected. The purpose of that original loan determines if its deductible or not. The only effect on the loan is a lower value of interest is calculated. When you drawn those savings out of the offset the original loan is unaltered and the interest reverts to a higher value.

The most effective offset arrangement is a offset tied to a non-deductible loan such as for your own home. This reduces non-deductible interest. Only when a occupied home is fully repaid of the offset is maxed should you then use a offset tied to a IP

A common mistake with offsets is to offset to a blended home loan eg part of the loan relates to buying the home and another part is for a holiday, car etc. If that property ever becomes a IP the deductible amount of the loan must be determined.....It wont be 100% because of the car loan amount drawn.