Loan Tax Deductible

Hi there!

While reading a post about paying down a PPOR or IP, someone suggested it was possible to get 100% IP Loan as tax deductible??!

Can someone please explain me how this works?

Thanks!

 

You can borrow against your home and use the loan to buy an income producing rental. Thats how and if you have enough equity you could borrow 100% and all the on costs if you wanted. (May not be a sensible but is permitted) . Its not a complex issue. Or you can use 80% loan on the Ip and borrow balance against home.

The loan security (ie home) hasnt a thing to do with deductibility. Its how the $$$ is used

If someone is in that position there also can be a strategy of using super savings as well. Super fund puts in say 25% and gets +ve geared income taxed at low tax rate of 15%. You borrow and your proportion of 75% is neg geared. Called an ungeared unit trust strategy.

In time in SOME STATES you can change the % ownership of the unit trust and there is no stamp duty. CGT yes but no duty. No legals. In time the property units are 100% owned by super fund. Financial, legal and tax advice is needed.

 

Purpose, not security, of the loan is what makes it deductible.

 

You just have to borrow.
Generally 80% of the value of the property being purchased,

and
The remainder from another loan, either secured against another property or unsecured (e.g. family)

See my

Terryw’s Ideal Loan Structure Terryw’s Ideal Loan Structure

 

Borrow the first 20% deposit from a family member who takes a second mortgage after the bank.

Borrow the first 20% deposit from a person (like a trust) who takes a second mortgage after the bank.

Or get unsecured (mezzanine) finance from a lender and use this cash as the deposit.

The property goes up in value (hopefully). You refinance the loan with the bank and pay the parents out.

 

Important to remember that borrowing money that is tax dedutible inst a investmnet strategy. ROI still is important

 

Thanks for all your reply.

While I believe I understand how equity works, I'm still confused about the relationship with a loan that is 100% tax deductible?

Let say I bought a property for $400k about 2 years ago that is now worth $500k.
I believe I can use this $100k equity to apply for another loan LVR80, so I could borrow $500k without having to put any money out of my pocket.
But what about the tax deduction in all this?

 

Interest is deductible if you borrow to invest.

 

I currently own 2 investment properties that I bought with my saving (not using equity).
Does it mean I can claim this in my tax?

Are you talking about negative gearing?

 

Savings is not borrowed money so there is no interest and therefore nothing to claim.

Tax Tip 9: Don’t use Cash in Offset account to Invest Tax Tip 9: Don’t use Cash in Offset account to Invest

 

Thanks, sounds like I definitely need to read this

 

Hey Terry,

I bought my 2nd IP using the offset account used for my 1st IP.

According to your link and example, if I understand well I should be able to deduct the increase in my loan repayment of my first Loan?

I had let say $200k in offset and was CF+.
I've used $100k to purchase my 2nd IP and now I'm CF- of about $200/year.
Can I assume I should be able to claim $200 of tax deduction?

 

That's correct because an offset account is not considered part of the loan so its not new borrowings. The loan is still deductible against IP1.

 

Best to segregate the various loans to ensure traceability. Can then demonstrate how usage of specific borrowed funds are linked to investment income. Don’t mix different loans as this muddies the waters.

 

Sounds like the OP only has 1 loan against IP1 and paid cash for IP2 so nothing to segregate?

 

If you had $100,000 investment loan for property A and $90,000 in the offset you would pay interest of $500 on the loan for property A (5% pa).

If you then took the $90,000 from the offset and used it to buy property B for $90,000 the interest on the loan for property A would jump to $5,000. All the interest would be deductible against property A not B.

Where ownership is the same there is not real difference but where ownership of B is different to A there could be differences between using the offset account and paying down the loan and reborrowing to invest.

Incidently if you had withdrawn $90,000 from the offset and bought a part of gold plated golfing shoes the interest would still be deductible.