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LoC funds for renovation - interest deductible?

Discussion in 'Accounting & Tax' started by pugstar205, 4th Aug, 2015.

  1. pugstar205

    pugstar205 Well-Known Member

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    Hi,

    Apologies in advance - this may be a very basic question or already answered somewhere on PC/SS.

    I have a LoC for $200k. If for example I were to use $100k towards an investment purchase, the interest would be deductible (generally speaking). However, if the property needed $50k of renovation work, could I draw down on the LoC for these funds and claim the interest as deductible - e.g. Interest on $150k?

    If not, what is the most suitable (tax effective) was to fund a major Reno?

    Thanks.
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Yes
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    yes...The key issue is keeping the LOC uses apart. ie :IP acquiistion, reno from other uses. A seperate credit facility (split loan) would be ideal so the loan is not blended.
     
  4. pugstar205

    pugstar205 Well-Known Member

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    Cheers. I can spilt my LoC so I'll do that.
     
  5. chylld

    chylld Well-Known Member

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    I thought interest on borrowings for renos (that aren't repairs) weren't tax deductible?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why
    Why do you think this?
     
  7. chylld

    chylld Well-Known Member

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    I looked this up earlier in the year and found an article similar to this

    I suspect I am getting confused between the capital cost of the renos being deductible, as opposed to the interest on borrowings to pay for those renos being deductible...
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes lots confuse this. Like buying a house- you cannot claim the cost but you can claim the interest on money borrowed to buy it.
     
  9. chylld

    chylld Well-Known Member

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    Thanks for the clarification, glad to get my head around it finally :)
     
  10. mcarthur

    mcarthur Well-Known Member

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    So there's two loans, the LoC for $100,000 (say 20% of purchase) and the IP loan (say $400,000 being 80% of purchase).
    Take another $50,000 out of LoC for renos before renting out, making that loan $150,000.
    Should the rent collected go
    a) into the LoC,
    b) into the IP loan repayments,
    c) into the IP loan offset,
    d) somewhere else (PPOR offset, under the bed, ...)

    Should expenses incurred in the managing of the IP (PM fees, fixing the toilet, rates, etc) be drawn from:
    a) the LoC
    b) the IP loan redraw,
    c) the IP loan offset,
    d) anywhere else (PPOR offset, under the bed, ...)
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Income should be paid into the offset on the main residence. Interest on the loc and io investment loan should be taken from the offset.

    The loc can be used to pay expenses other than interest but get tax advice first.

    See my tax tip on debt recycling.
     
    bonanzawealth and mcarthur like this.
  12. mcarthur

    mcarthur Well-Known Member

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    Thanks Terry!
     
  13. Pins

    Pins Well-Known Member

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    Wondering why you need to keep the LOCs separate if both are tax deductible?

    I have taken a BA fee and a deposit from the same LOC. Does that mean I've mixed the loan? Can I pay back the BA fee and still claim the interest on the LOC?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Hi Pins

    Please see my post on mixed loans in the legal forum
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  16. Pins

    Pins Well-Known Member

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    Thanks Terry - sorry but can you explain why the renovation borrowings need to be kept separate from the acquisition borrowings ie deposit monies?
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If it is for the same property then there is no need to keep separate.