Personal Loan (unsecured) for property investment

Discussion in 'Accounting & Tax' started by giraffez, 2nd May, 2017.

Join Australia's most dynamic and respected property investment community
Tags:
  1. giraffez

    giraffez Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    595
    Location:
    NSW
    Is a personal loan (ie one without security or collateral) possible to use for buying an investment property . If it is, the fact that its a "Personal loan" and not a mortgage, is it tax deductible?
     
  2. D.T.

    D.T. Specialist Property Manager Business Member

    Joined:
    3rd Jun, 2015
    Posts:
    9,189
    Location:
    Adelaide and Gold Coast
    Of course still deductible- its still interest incurred in the pursuit of making money. Doesn't matter if the personal loan was from the bank or even your spouse.

    Whether you'd want to do that is a separate question entirely - ie the higher interest rate incurred would make it tough to make a profitable return. Might be an idea for a short term thing or emergency situation.
     
    giraffez likes this.
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,666
    Location:
    Australia wide
    Hard to get a bank to lend where the deposit is coming from a personal loan
     
    tobe and giraffez like this.
  4. Richard Taylor

    Richard Taylor Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    434
    Location:
    Brisbane
    Not really. Where you have equity in other properties both the mortgage insurers accept a personal loan as deposit.

    Even on your first purchase at at 85% most lenders have no issue and even at 90% lvr there are a number that accept it.
     
    Terry_w likes this.
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Yes provided the use of the funds is clearly made from the loan to acquire the property and related acquisition costs etc. ie deposit, duties etc. The lender that then lends the balance of funds will consider the loan repayments towards servicing. Due to the short term and the P&I basis that will affect capacity for the remaining borrowings.

    Personal loans do come with a tax problem. Unlike normal home loans many lenders do not provide a running account for the loan. Therefore determining the annual interest element of the repayments can be difficult. A common mistake is to take the term interest (eg $5,000) and divide that by the term eg 5 years. That would be incorrect (ie $1,000). The correct approach is to deduct based on the term using months (ie If loan commences in April then first year is 3 months out of 60) and also to adjust for the reducing balance effect of the loan. This will weight more deductions to the early years of the loan. Accountants and tax agents are familiar with that approach. (Or should be !!) Using my quick calcs in the example I used the first year deduction may be $568, year 2 $2068, year 3 $659 etc....

    Also dont miss the monthly fee built into each repayment or upfront - In which case the borrowing cost would be deductible over the term (or up to 5 years)
     
    giraffez likes this.
  6. giraffez

    giraffez Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    595
    Location:
    NSW
    Thanks for pointing that out. How did you arrive at those calculations? First year is 3/60 x 5000=250
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    I did say ...and also to adjust for the reducing balance effect of the loan. This will weight more deductions to the early years of the loan. Accountants and tax agents are familiar with that approach.

    That the magic clients get when they engage with a property savvy tax adviser.:cool:
     
    tobe and Corey Batt like this.
  8. giraffez

    giraffez Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    595
    Location:
    NSW
    Still with your figures i cant see how you can come to $568 for the first year. Is there some assumption of other values not mentioned in the post. All i'm working with is the $5000 and the 60 months timeline.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Think of it this way.

    On day one you owe $25,000
    On day 366 you owe $23,000
    and so on.

    Its the same with a P&I home loan. The balance reduces. So the deduction reduces. Its not linear.
    Same occurs with depreciation. Take a $30,000 vehicle. Year one depreciation is $6750. Year five its $2435.

    A mathematical approach has to be taken to split the interest and not just divide by 60
    See attached file
     

    Attached Files:

    tobe likes this.
  10. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,091
    Location:
    Adelaide, SA
    Absolutely - not every lender will touch this but certainly some good mainstream options which will take it if documented appropriately.

    The hard bit is getting sufficient PL and end servicing to stack up, the lower val purchase the better.

    As per OP's question everyone has already knocked it on it's head.
     
  11. giraffez

    giraffez Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    595
    Location:
    NSW
    Thank you