Recycling Debt Strategy when there is no Non-Deductible Debt

Discussion in 'Investment Strategy' started by Terry_w, 24th Aug, 2017.

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  1. Terry_w

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

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    Recycling Debt Strategy when there is no Non-Deductible Debt


    Recycling Debt involves the conversion of bad debt into good debt.

    Bad debt is debt on which the interest is not deductible

    Good debt is debt on which the interest is deductible


    So how and why would you recycle when there is nothing to recycle? The idea is to plan so that you could quickly recycle future bad debt when it arises.


    I can think of 2 situations where this may be useful:

    a) Someone renting without a main residence, and

    b) Someone about to ‘retire’.


    In both cases the persons may want to build up larger sums of cash which they can use tax effectively in the future. Instead of paying down debt they may be interested in increasing debt. This is because increasing deductible debt can allow for more tax effective use of cash.


    So how do you do it?

    You must be able to borrow further or it cannot be done. The person living at home or renting while owning an investment property can borrow in the following situations:

    a) To pay general property expenses;

    b) To pay interest;

    c) To pay for repairs;

    d) To pay for improvements;

    e) To pay for business expenses;

    f) To invest further.


    Note that not all the above will always result in deductible interest. You should obtain tax advice regarding Part IVA and the ATO denying a deduction. This advice needs to come from either a lawyer or a tax agent.


    Where can they borrow from?

    Early on the choices may be limited to parents or other related parties. As existing properties gain equity it can be possible to borrow against the property further.



    For the person about to retire they will probably have much more equity than a person starting out. They can set up further loans secured against existing property and use these loans to pay for as much as they can while building up their cash in their offset accounts.


    Once they retire they can draw down on the cash in a tax effective manner. Where the offset is held against an investment loan withdrawing money will result in more interest and this interest should be deductible if set up right.

    See
    Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest


    This results in a tax effective retirement as each time money is spend for private expenses it is partially funded by the ATO. It would be much better, in most situations, to having paid down a property loan and living on rent.

    See more on this at
    5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement
     
    lewigie, fritzsticker, pippen and 3 others like this.

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