Loan Tip: Strategy for Borrowing with Nil Borrowing Capacity

Loan Tip: Strategy for Borrowing with Nil Borrowing Capacity



When you can’t borrow you can’t borrow! But you might be able to lend…

This post was prompted by a poster who was paying very large deposits on property. This is a loan tip with a bit of legal and tax thrown in.


Example

Maggie has 4 investment properties and has hit her limit. She starts saving in offset accounts – well she has been doing this all along. Now with her savings and that small bank robbery she has enough to pay cash for a property.

But what if she needs her money back in the future? It would be tax ineffective to borrow against the properties for retirement in the future, assuming she can borrow again.

Maggie sets up a company to buy the next property. She is sole director and the trustee of a discretionary trust is the sole shareholder.

Maggie lends the company $400,000.

The company buys the property.

A few years later Maggie’s serviceability improves. The property has jumped in value so the company now borrows from a bank and repays its loan to Maggie and Maggie then uses the $400,000 to buy a yacht to sale around the world.

If done right the company can claim the interest against its rent as it has just refinanced a loan that was used to buy an investment property.

As an added bonus depending on how it is set up, when Maggie took $400,000 from her investment offset accounts her interest jumped up and increased her tax deductions.

Similar to this:

Tax Tip 232: Simple Tax Strategy to Increase Negative Gearing Tax Tip 232: Simple Tax Strategy to Increase Deductions