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Selling with Loan Contamination

Discussion in 'Property Finance' started by legallyblonde, 7th Jul, 2015.

  1. legallyblonde

    legallyblonde Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    685
    Location:
    TAS
    So... The structure of my IP1 is as wrong as it gets! This loan is fixed for another 13 months and I have 40k in redraw... I am currently trying to get my head around the options as I plan to buy IP2 and find out if there are any affordable options! I realise that I am 'stuck' and I may have to make a call and pick the lesser of the evils!

    1) Break fixed period so I can get a split loan (too expensive)
    2) Suck it up and pay a much higher LMI than I was planning (too expensive)
    3) Contaminate loan... But hold until I can afford to pay of both loans? (locks me in for too long)
    4) Contaminate loan... Sell one eventually and pro-rate the interest I can deduct for the other property (painful but possible... If legal?)
    5) Apportion/pro-rata the P&I then split the loan at the end of the fixed period? (Legal?)


    Basically I am wanting to know if option 5 (preferred option, followed by 4) is legitimate? This options would give me the most flexibility and is easily the most affordable. I am hoping that by splitting the loan within a 12 month window or is this too late?

    I know I will need to speak to a broker when I am ready to buy... But I would like to get my head around this issue and the options first!

    I hope this makes sense! Many thanks in advance for your thoughts!

    I only become aware of this contamination issue when I read the following post by Terry_W (thank you for your ongoing amazing contributions by the way)

    "Mixing loans happens when you have 1 loan with 2 purposes. Even if you borrow $50,000 to invest into property A and another $40,000 to invest into property B you will have a mixed loan. But where both uses are for investments in the same name it doesn't make much difference tax wise as the interest of the loan will wholly be deductible. You still need to apportion interest, but if you get it wrong there is no tax difference.

    The problems arise when you sell either property A or B because the interest on that $50k or $40k will not longer be deductible. This is why you should split even if all uses will be for investment, but relating to different investments.

    If one use is investment and another personal then you have a more serious issues as you need to apportion the interest and must get this right or you will be claiming too much or too little. You also cannot pay down the non deductible portion independently of the deductible. i.e. any deposit into the loan will result in you paying down both portions. This means you are paying off the non deductible loan and losing tax deductions."
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
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    8,989
    Location:
    Sydney
    Most people would choose Option 6 - stick you head in the sand and pretend nothing is wrong.

    Selling may be an option but the ATO allows you to work out the relevant portions and then just split the loan into those portions. You can then keep the deductible portion IO and pay off the other portion and then reborrow (taking care not to remix).
     
  3. legallyblonde

    legallyblonde Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    685
    Location:
    TAS
    Option 6 sounds amazing!!!

    Oh that sounds promising! So to save the hassle of splitting at point of sale.. That makes it sound like the preferred option 5 is viable?! That is comforting... My assumption was that if I can demonstrate/explain how the split was calculated that would be fine.