Refinancing and interest deduction - how do

Hi All,

I'm trying to refinance all my properties with the intention of buying another investment property with the extra cash I get from it. I wonder if this structure that the bank is offering has any benefits to my income tax deduction

Property A (PPOR) Still owes $175K
Property B (Investment) Still owes $290K
Property C (Investment) Still owes $785K + $100K I borrowed to build a granny flat. But I realised that I have 'contaminated' the $100K as I have put the money into my personal account where I withdraw cheques from (https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/)

All loans are currently interest only

The bank now offers 3 separate loans where each loan have 80% LVR
$560K secured against Property A
$308K secured against Property B
$840K secured against Property C

After clearing my existing debts I will have extra $358K which I intend to use as investment later. I'll keep the money in an offset account to offset the interests on Property A. But once I start spending this money on investments will I be able to deduct the extra interests incurred on Property A? If not how should I structure this so I can claim interests on this extra money when I spend it later?

If someone else has posted similar questions before could someone kindly point me to the post?

Cheers

NWH

 

Bad set up.
Where is the $175k loan after the restructure?
Keeping money in offset is a bad idea.

Why not keep all existing splits and just set up additional splits on all properties - up to 80% LVR???

 

Never trust a bank to get your structure right - most times they have no idea.

I know you said each property has one loan attached, but are you 100% sure this is the case? If you've been dealing direct with the bank it' highly likely you're x-coll too, unless you specifically told them not too.

Re loan 3, why is it not $885k to reflect the original loan plus the granny?

As Terry said, leave each loan as is, and create new loan splits for the equity on each. Which lender are you with?

 

I'm dealing with a broker but he seems to have no idea about structuring for the tax benefits.

could you please explain this is usually done?
"keep all existing splits and just set up additional splits on all properties - up to 80% LVR"

 

see my tax tips about mixed loans. If you combined loans, especially deductible and non deductible debt then you will be losing tax deductions.

 

Loan 3 is $840K, not $885K as they are simply taking 80% of each property separately. what's even more shocking is that my broker says with this strucure i need to come up with $45K cash to discharge the existing loan. how does it make sense to pay money to borrow money???

 

You will be throwing money away follow that sort of advice.

 

You're completely right - you don't need to chip in anything.

Add to that, what they've proposed is a complete mess.

You need a new broker asap.

 

"leave each loan as is, and create new loan splits for the equity on each. Which lender are you with?"

Is this possible if I switch from one back to another? How is this done in practice? (is there a previous post about this?)

 

@NWH I'm not sure what you mean by switching back? If you meant bank, yes you can switch banks no problems.

From what you've said, it might look like this -

Property A (PPOR) SPlit $175K + split for equity + split for Property C granny shortfall (approx $45k)
Property B (Investment) Split $290K + split for equity
Property C (Investment) Split $785K + $55K for part of granny

 

Does this mean I can continue to claim interests deductions on Split $290K against Property B (Investment), Split $785K against Property C (Investment)? Is it correct to say this structure ensure each loan is only used for one purpose? i.e. Split $290K used for purchasing Property B before, whereas Split for equity is used for some other investment?

@Jess
for Property A (PPOR) why should it be split 3 ways? can't it just be Split $175K + Split for equity, like Property B and C?

@Terry
From Terry's advice in https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/
"To avoid the risks of ruining deductability I suggest a better way to proceed would be to use an Interest Only loan where you can draw down the funds at settlement and put them straight back into the loan. The funds can then be reborrowed from the loan at the time of investing."

Is this the correct way to do it in my situation?
I use the new money I got from refinancing ($385K in total) to repay the Splits for equity down to say $10, then at the time of investing I withdraw the required amount using the redraw facilities from these splits for equity.

 

Pls see in blue above.

I would choose a lender who allows to to transact directly from the loan account, or set up a LOC. It saves mucking about with offset accounts, which in my experience often get disbursed incorrectly no matter how clear you make the instructions.

 

@Jess THank you very much for your time on this.
Just to make sure I'm understanding your points, does the following look like the correct end results?

Property A (PPOR) as security for:
SPlit $175K --- used for discharging old loan, available funds $0
split for equity (340K) --- available funds $340K, can transact directly to pay for new investments
split for Property C granny shortfall (approx $45k) --- used for discharging old loan, available funds $0

Property B (Investment) as security for:
Split $290K --- used for discharging old loan, available funds $0
split for equity (18K) --- available funds $18K, can transact directly to pay for new investments

Property C (Investment) as security for:
Split $785K --- used for discharging old loan, available funds $0
Split $55K for part of granny --- used for discharging old loan, available funds $0

And then in my tax return, can I claim the interests in this way:
Property A --- no interest can be claimed as it is PPOR
Property B --- claim interest on $290K against Property B rental income
Property C --- claim interest on $785K + $45K + $55K against Property C rental income
$340K and $18K --- can start claiming interest against new investment income provided hat the money was used to purchase the new investments

Also note that my current bank has bundled my loans this way
$175K, $785K, $100K has Property A, B, C as security
$290K has Property A, B as security
Does this have any effect on deductablity once I refinance and reallocate the securities on to the new loans?

 

The splits look okay to me, but deductibility is not on the property the loan is secured to, it's dependant on the purpose the funds were used for. So if you were renting out the granny, the $45k secured against the PPOR would be claimable.

 

1) what happens when I sell Property A?
I would imagine I'll need to pay off splits $175K, $340K and $45K (=total $560K) to release the mortgage. But I don't want to pay down the splits $340K and $45K as I'm claiming tax on the interests on these splits. What can I do in this case?

2) what are the pros and cons of making the all loans cross collateral compared to above (1 security per loan)?

i.e.
Loans $175K, $290K, $785K, $385K all loans have 3 properties as security?

 

If you sold property A you would have to substitute the security or replace the security with cash in a term deposit (if your lender allows this) if you didn't want the loan paid out.

Do a search on x-coll - there are a million reasons why it's a bad idea. here's a good place to start https://propertychat.com.au/community/threads/apparently-its-okay-to-xcoll.5104/unread

 

1. Substitute security
- move loan to new property
- move to existing property it was used for (if growth)
- use cash as security temporarily

2. see recent thread
https://propertychat.com.au/community/threads/apparently-its-okay-to-xcoll.5104/

and

Legal Tip 8: The legal side of avoiding cross collateralising properties https://propertychat.com.au/community/threads/legal-tip-8-avoid-cross-collateralising-security-properties.562/

 

From Terry's advice in https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/
"To avoid the risks of ruining deductability I suggest a better way to proceed would be to use an Interest Only loan where you can draw down the funds at settlement and put them straight back into the loan. The funds can then be reborrowed from the loan at the time of investing."

what happens if the lender cannot provide this?

my broker says on settlement what they will do is:
1. Loan account with the amount of equity released
2. Transaction account with the available balance matching the loan amount in 1. This offset the loan and effectively bringing the interest to $0 until money is withdrawn from the transaction account.

Will this ruin deductibility?

 

I answered this in that post = maybe deductible.

Best to get your own tax advice.