Loan splits for each property and costs

Hi All,

If you have a loan with multiple splits, in this mix are costs for purchases, these splits are for the remainder of purchase price, some splits may have had costs for more than one property.

When setting this up, I matched splits from prior loans. I am about to do some more splitting, and wanted to ask.....

Is there merit in making splits to match each actual property ? and if yes, what costs should be included or excluded, I was told it all can be one large split, but this would not seem ideal if selling off later and probably other reasons.

Any negative to changing amounts on prior existing splits ?

 

I've written several tax tips on this. Best to keep loans separate. i.e. don't mix loan purposes, even where both purposes are investments.

 

I had different advice that I questioned at the time, but also original loans existed before that, it would seem accounting will be easier, so am in a position to split now, if that will have no ill effect (there is no personal use and I/O)

I can easily split balance of purchase price, mortgage fees and stamp duty fees, B&P, legals to match property if it is worth doing after the fact.

Going forward, it is good to have best intentions, sometimes you may have a split setup 9or some do not have split option AFAIK) intending to buy for say 500k and you find a bargain at 400 and you use deposit from this split, so must be ok to vary the loan to match you would think ? as long as it is clear and I/O

I will re read the tax tips too.



PS I think I will just go and do this now, the I/O loan/s are with one supplier and not at all related to anything non deductible, so the question is, when split, how to calculate and what to include, it would seem to be cleaner to just add up all items listed above and create a split from that, then look at any surplus and make sure it is all deductible or just wear it if some of it turns out to be non deductible (could use recycling if that was the case)

 

After reading near all day, I think I have no further clarity, seems all things related to the purchase in which interest is incurred should be deductible, so, this may be a better question.

If going through and splitting things now, what things would you leave out of the split ?

What is the best plan when you do not know what your next purchase price will be, but want a split ready, I guess you have no choice but to make it larger then adjust the split post settlement.

All of the above is in relation to creating deductible loan on the portion left after the main mortgage loan.

 

Did you have a read of my ideal loan structure Terryw’s Ideal Loan Structure

Can't remember, but I think I covered this in that thread.

 

Read a lot of them, you have so much good content, it starts to get hard to keep on top of your tips's ! Will go read that one now, ta

 

Hi Terry, yes, I had read that one prior, what I am thinking of or talking of is separating loan "B" in your example into separate splits to match each place, maybe it is not required, but was thinking of it as now I have to reduce non deductible and create a split for next place, I can make multiple changes at once, so that is what I was thinking to do, if no real benefit, I may leave for now.

 

You can estimate now and then readjust the splits down the track perhaps.
Also look at consolidating these equity loans into the main loan of the property it was used for - down the track.
Tax Tip 36: Consolidating Loans for investment properties

 

Would you consider insurance in the purchase cost base ? I know am probably over thinking this, but it would be good to have these at the base cost is what I am thinking...

will use round fictitious numbers just for simplicity

500k purchase price

So purchase price - main loan amount mortgaged by property (400k) = 100k

So a split made up of the following

100k balance of purchase price
10k stamp duty
1500 for related mortgage and transfer fees
1500 legals for conveyancing
1000 insurance ??? (required by mortgage agreement)
500 Building and Pest

split amount = 114500

Would insurance be part of it, I also assume best to keep any initial repairs or reno separate ?

PS for anyone doing this, ask about the fees & doing it prior would mean avoiding fees most likely.

 

2 ways to look at it
1. include all costs by borrowing from split A
2. set up a separate split for the ongoing expenses other than interest.

If the ATO deny the deduction of interest on money borrowed to pay expenses option 2 would allow you to easily segregate and work out the portions.

 

Yes, I would separate them like that, not really planning to create loans for ongoings, not enough money to do that

What are the thoughts on this.....

If you are lowering non deductible by doing split/s......is there any way at a later time, those exact splits could be combined if the PPOR becomes an IP.........or maybe a sale to spouse before becoming an IP ( would that trigger CG )

I have a choice...... split the loan now and both in debit by split amount, then pay down leaving a nominal amount so loan does not close before drawing for other use

or

pay down non deductible then create a clean new split with a zero balance drawn.

I know which one is technically best, both should pass if it can be shown what was done and was for.

 

If you borrow for the deposit and costs for the property separately then this could be consolidated into the main loan for the property, once capital growth has made the LVRs acceptable.

example
$100,000 purchase
$25,000 deposits and costs coming from LOC secured against IP1
$80,000 coming from ANZ bank.
105% lend
Both loans relate to the new purchase.

After a while the property jumps to $200,000.
At this point you increase the ANZ loan by $25,000 to $105,000 and use the proceeds to pay out the LOC (assuming no mixing in the LOC).

 

Yeah, I am with you on that & why you say in your tips to keep them separate.

This would also then leave you with paid off splits (if paid down to say $10) that you could use again for further IP's if/when required.

Have you done a tip at all in regard to what I was aiming at......so you split from PPOR loan A to use on IP B , then later if you want to make the PPOR into an IP, best ways to tackle that......can the split be re joined to form original loan amount (I think I can hear you yell "NO" and that is what I am thinking too)..... any best paths for later such as selling to spouse therefore increasing loan again ..... or just sell and buy something else (which is what I have always done in the past due to the complexities).

I have never sat down and calculated what each scenario's plus or minus is, I better do that one month

 

Deductibility depends on the use not the security. So joining splits doesn't change the deductibility.

 

Yes, totally with you on that, but what I mean is ....

I will split non deductible from A, then new split of 100K will be used for IP B and is then becomes deductible due to use, but later.......

A may become an IP ........ and if in a position to do so, would like to merge 100k split back to loan for A so original loan amount is restored...... but I think this may be a no go......... but then again once A becomes an IP the use would be the same, if no then your debt recycling tip could be put to use, or just buy more.

 

Merging the loans won't change the use that the funds were put or the deductibility of interest - but it may create a mixed purpose loan which adds further complications.