spliting home loan to fund investment property - tax deductible?

Hi all,

Wondering what people's thoughts are on the following scenario.

I have a PPOR at 1mil with a home loan of 700k. I also have a spare 400k sitting in the offset account.

I have recently purchased an investment property for 400k. Due to the issue of servicing and favourable interest rate, I am looking at splitting my current home loan of 700k into 400k+300k. And then use the 400k to fully fund the investment property.

Question is - can I fully tax deduct the interest on the split loan of 400k?

Thanks!

 

if you set it up correctly you could. Have a read of my tax tips.

 

I didnt understand the bit concerning you have already purchased it but now want to change the manner of how it was financed ? Perhaps you mean - Signed a contract and now you looking at financing it. If so....

That idea seems sensible. But prior to doing this get your broker to get it all cleared. The manner of how the $400k in offset moves to the existing $700K loan and then a new split and then payment for the property should also be carefully considered. Often a new split drawn down may need to go to an offset first - You dont want that to have other $$$ in it. Terry has a good tax tip on the issue.

The benefit is far more than just the good rate. You will recycle non-ded debt to deductible debt.

 

Yes that's what I meant. Contract was signed, settlement is in 2 months time, I am now looking at ways to finance it.

"The manner of how the $400k in offset moves to the existing $700K loan and then a new split and then payment for the property should also be carefully considered" - this was the exact issue I was wondering.

It was suggested by the bank that I simply just split it, and use the 400k for the settlement. I thought I would have needed to split it, pay down the loan, then redraw it for the purchase.

I have read Terry's tips on debt recycling, mixing loans etc. Makes lots of sense!

 

Your bank is wrong - if that’s all you do the loan will not be deductible.

 

The bank is simply telling you one way to do it, probably the easiest way for THEM.

Consult an accountant or tax professional to discover how to finance this purchase for maximum tax benefits for YOU.
Marg

 

The Royal Commission found most banks have appalling advice and product compliance. And providing tax advice when they have no qualifications is up there on a long list of things.

Jess states the obvious. If you draw the funds from a offset then its not borrowing money. However if the loan had been drawn down THEN credited to a offset with NOTHING else in it and THEN used to buy the property it may then be fully deductible. Important no other $ exist in the offset prior to the new loan draw down and then no other funds are added before the $$$ is used.

Ironically tax advisers and accountants cannot provide credit advice without a credit license (and then I wouldnt be a tax adviser giving the advice) but we can advise on how to ensure a loan is deductible

 

What you would need to do is to split the loan into at least 2 portions. $400,000 being one of them.

Then pay off the $400k portion, perhaps less $100 so the loan is not closed.

Then reborrow $400k, via redraw, and use it for investment purposes. Take no detours with this money if you can, if you can't then make sure it is placed into a clean and empty offset account before immediate use.

 

I see this same thing written endlessly. It seems very clear BUT...endless people seem confused by it especially when an inexpert person tells them they can do it some other way. What I find sadly amusing is they almost always question the person who actually knows the answer. And give more credit to the wrong view ie the broker in this case.

Its a great example why you never listen to friends, colleagues or believe someone who isnt qualified. 9/10 they get it wrong or fail to mention something important. And even on PC its not always 100% of the facts. I often only explain 80% of the issue. Its why every investor should surround themselves with people who know this stuff.. The extra cost can pay for itself. Thats how I see my time. I add value.

I see it all the time with tax. There are 100 traps that the DIYer wouldnt have a clue about