Join Australia's most dynamic and respected property investment community

Redraw with Refinancing (Tax Deductible)

Discussion in 'Accounting & Tax' started by albanga, 2nd Dec, 2015.

Tags:
  1. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    Hey All,
    I know I should know this but it's been a while since I have been in this area so will ask again.

    If you have a 300k IP loan of which 20k is sitting in redraw, when you refinance and you want to keep this 20k for future investment, what is your best course of action to have it tax deductible?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,952
    Location:
    Sydney
    What is redraw?

    It is a facility that allows you to borrow money. Money isn't 'sitting' in redraw, but there is a $20k loan which you can use any time.

    If your loan balance is $300,000 and all this is associated with the purchase or reno of the property and if you refinanced to $320,000 you have borrowed extra money. So all the usual issues with borrowing money arise. Where did the extra $20k go? Was it used for a private purchase? Is the loan now mixed? Was it deposited into a savings account etc.

    Your best bet is to forget about the redraw amount and just split your loan up if there is equity. Say $300,000 IO plus $100,000 LOC = for example.
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,756
    Location:
    Perth WA
    Just create a new split for the $20k. Easy! :)

    End result - Loan 1 - $280k, Loan 2 - $20k
     
  4. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    @Terry_w I am a bit confused sorry.
    In the example I am using the loan limit is 300k but additional payments mean the balance is at 280k. If I wanted though I could take this money out (so yes in essence loaning back the 20k in additional payments I made). If I did that though and stuck it into the offset it would become contaminated. I suppose it could be stuck into a new account and sit there until needed for a future investment?

    @Jess Peletier
    So it is just a matter of when refinancing to say I want 2 splits, split 1 will be the outstanding loan amount which relates to the property. Split 2 is the 20k "equity" in the loan. Which really if that is the case, best to wait until valuation and take as much equity as possible to 80%?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,952
    Location:
    Sydney
    Just substitute $280 for $300 in my post.

    Taking money out now would contaminate the loan, probably.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,756
    Location:
    Perth WA
    Yes - get a val done with which ever lender you're using and access as much equity as possible up to 80%.

    Who are you refinancing with? Or are you staying with the same lender?
     
  7. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    @Jess Peletier just researching at the moment and getting my head back around loan contamination. It would likely be a new lender though.

    @Terry_w so am I right in assuming that if you refinanced to a new lender and borrowed back the 300k into the one loan account it would be mixed purpose? Being that the new lender paid 280k to the old lender for the mortgage (tax deductible as the purpose is investment) and the extra 20k is additional borrowed funds that are no longer relevant to the property?
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,952
    Location:
    Sydney
    Yes this is correct.
     
    albanga likes this.
  9. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    Thanks Terry
    I thought that would be the case or else paying down deductible debt would not be that bad!
    For example if you paid down your PPOR to 100k and then turned it into an IP, you cant just refinance it back up to 500k and claim 500k in deductions. You would instead have 100k of deductible mixed with 400k of non deductible.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,952
    Location:
    Sydney
    Yes again. That is why it is best not to pay down the home loan if you may be moving out in the short term.