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Refinancing house and turning it to IP in the future tax help

Discussion in 'Accounting & Tax' started by mighty888, 3rd Aug, 2016.

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  1. mighty888

    mighty888 Member

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    Hi all,

    We are currently refinancing our Owner occupied home loan.
    We owe 375k and the house is valued at 550k, We are going IO as we plan to turn the house into an investment property in 4-5 years. We will build up the offset account for the next deposit by adding repayments as if we were still doing P&I.
    We can borrow an extra 65k in equity which will keep us at 80% LVR.

    My question is, how is it best to do the 65k for tax purposes for when we do make it an investment property?

    Should we do a split loan? 375k and 65k, will this help in regards to keeping the 65k separate for tax deductions?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The $65k loan interest will only be deductible if it is used for investment purposes.

    Set it up as a IO loan only if you can pay directly from the loan account. Otherwise use a LOC
    Yes split it.

    Have you ever used redraw or increased the loan amount on the original loan? Including taking money out of the account after the initial draw down.
     
  3. mighty888

    mighty888 Member

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    We are waiting for the refinance loan papers to come in the mail. Our old loan was with an offset account and we had used the redraw a few times.

    With the new refinanced loan he has set it up as a IO loan for 440k, we owe 375k. As soon as we get the loan we will split it as 375k and 65k or must this be done before we sign the papers and setup the loan?

    Loan A 375k IO will have multiple offset accounts.
    One for putting in P&I value amounts into each month.
    One for any extra money we can put in. This will most likely get used to pay off credit card ect

    Loan B 65k IO will have an offset account which we will leave the 65k in and not touch it. We will not pay any interest on this.

    Once we have a big enough deposit we will plan on turning current home into an investment property and look to purchase a new Owner occ house for us
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Just watch the bank. They will put the $65K into a offset in most instances. You dont really want that and NEVER add other $ to it if they do. Ideally ensure there is a redraw and that you can REPAY the $65K when its put into the offset and then redraw when you find the right property.

    Reason they do this ? Bank ending requirements refer to an advance. They dont usually leave a new loan undrawn except a LOC.
     
  5. mighty888

    mighty888 Member

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    Sorry a bit confused by all this, Just want to make sure we get it all right at the start, If it helps we are moving to CBA
     
    Last edited: 3rd Aug, 2016
  6. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Firstly - welcome aboard :)

    Set up two loans.

    Loan 1: $375k
    Loan 2: $65k (place $65k cash back into loan - or into a dedicated offset) at settlement.

    Easy peasy.

    Cheers

    Jamie
     
  7. mighty888

    mighty888 Member

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    Good to see you from whirlpool!

    So as of now it will be one loan, our lender said we can split the loan after settlement. Is this alright? or should we get it done before hand. We have not signed anything
     
  8. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    I'd get it done now.

    Technically with CBA it's possible to do post settlement - but why not just do it properly now?

    Cheers

    Jamie
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you have used redraw then you already have a mixed loan. You need to further split it because the interest on the full $375k loan wont be deductible.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Actually you dont need to split but would have to apportion the interest and only claim part
     
  11. mighty888

    mighty888 Member

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    I'll have to find out from our mobile lender if it means we lose the $1250 cash back as that promo is over now.
     
  12. mighty888

    mighty888 Member

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    Sounds all confusing :( We were on P&I and had made some extra repayments on the loan, we then found we needed to use some of that extra money.
     
  13. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    You should seek legal advice about your specific situation, but generally if you use redraw to purchase anything except an income producing asset, like a car or to take a holiday, you will have a mixed purpose loan.

    Again seek your own legal advice, but deductibility of interest is determined by the use of the borrowed funds - if the $65k is used, for example as a deposit for a new owner occupied purchase, that $65 is generally not deductible. Just because it has been borrowed against the investment property does not make the debt tax deductible.

    I would 100% be pushing for the $65k to be set up in a separate split from day one, I would even consider using a line of credit, but at a minimum make sure the bank is paying the $65k into a separate offset account, with no funds already in it.

    Hope that helps :)
     
  14. mighty888

    mighty888 Member

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    So it would be best to speak to a tax accountant about this?

    So if I am correct, The 65k will 99% be used to purchase our next house to live in. So end of the day we will not be able to make this amount as a tax deduction Unless we use the funds to purchase an investment property?

    Would another option be in 4-5 years time sell our house and purchase a new house with all the extra money. Then use the equity in the new house to purchase an investment property?
     
    Last edited: 3rd Aug, 2016
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It is not the $65k loan that I am worried about but the existing one.

    You can deduct the interest on the $375k if that loan relates solely to the purchase of that property - once that property is rented.

    But you paid the loan down and redrew some money - that is a separate borrowings and unless you used those funds for that property then the $375k loan will have a mixed purpose.

    you should speak to your tax agent or lawyer about this.
     
  16. mighty888

    mighty888 Member

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    I will have to find a tax agent as never really needed one.
    We did use most of the money to extend the deck on our house.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  18. mighty888

    mighty888 Member

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  19. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Think he threw in lawyer as well.......

    I feel for you @mighty888 - you came here seeking clarity and things have just become more confusing.

    Cheers

    Jamie
     
  20. mighty888

    mighty888 Member

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    Yeah I have came here more confused than ever