Strategy: Borrow Against the Main Residence for an Investment Loan

I have learned a lot from your posts! Thank you Terry

 

@Terry_w For this strategy to work, does the investment loan have to be paid (ie the funds can't just be left in the offset account linked to the loan)? Thanks, Terry.

 

Do you mean the strategy of borrowing against your main residence and paying down the investment debt to get owner occ rates?
I think you have to pay into the loan. But I got a private ruling from the ATO for one client which said they could pay it into the offset account and not the loan and still claim the interest. I wrote back to the assessor questioning if this was a mistake and they insisted it wasn't. If you don't have a ruling I would suggest it best not to do.

 

Thanks a lot for clarifying that, Terry.

 

This is specifically mentioned in TD 2012/1 and the ATO doesnt seem to have concerns...Para 3(h). They seem to consider the interest effect is the same in each situation. What is interesting about that view is that the property use could change and future years could have an enhanced tax benefit for the use of an offset v applying direct to the loan.

 

So if I am understanding this correctly, if you redraw funds from a PPOR loan to pay down your investment loan those funds are now tax deductible as the new purpose is for an income producing asset.

Based on this, if you were to redraw funds to pay off your monthly repayment on an investment loan can that then be deductible? I am assuming that is not allowed as you are basically double dipping but just wanted to make sure.

 

1. The interest could potentially be deductible.
2. This would be borrowing to pay interest, or capitalising interest and would be deductible potentially, but the ATO could deny the deduction as it is a scheme

 

Hello all & @Terry_w
I am trying to wrap my head around a scenario and would love some input:

Investor A has two IP Principal and Interest loans
IP1 loan $160,000 ($158,000 in redraw at the limit to stop closure of loan)
IP2 loan $270,000 ($265,000 in redraw at the limit to stop closure of loan)

He is planning to buy a PPOR and get a loan of $365,000 this year and next year invest in another IP3 valued at $340,000. investor A wants transfer the redrawn amounts from IP1&2 into the PPOR loan to the limit before closure and then redraw the amount of to pay fully pay off IP3, does this mean that the interest of the PPOR can be deductible? or is this even a good strategy?

Investor A doesnt consider a loan for IP3 a possibility due to the time of purchase will be when he will start a family and doesnt think finance would be available.

Apologizes in advance for any misinterpretations, spelling errors or confusion. I appreciate any opinions on this scenario.

 

The words "in redraw" mean the loan has been paid down ? ie Loan #1 is actually a debt of $2K ?

The new USE of the new loan would be private and so the old loans would be both blended and also the new proportion totally non-deductible. Just because a loan is secured to a IP doesnt make a new borrowing deductible. There a loads and loads of threads here about "blended loans" and the use issue

 

Hi @Terry_w

I have a question as to if this strategy would work for me. We recently sold IP A The deposit, stamp duty, etc was paid for using a loan split against IP B. Since we have now sold IP A, the loan split against IP B is no longer tax deductible.

This is fine at the moment as it is 100% offset. However we are considering buying a PPOR in the future and I want access to the offset funds to reduce our debt on our PPOR. If I just take the offset funds out now, the interest in non-deductible, obviously not ideal.

is there a way to make the loan split against IP B tax deductible again? For instance, pay down the loan split using the offset funds, redraw the money, use it to pay down the main loan against IP B (or put those funds in the offset account against the main loan for IP B) then redraw from the main loan for IP B and put the funds into the offset account?

long story short, I’m trying to make the old deposit loan split tax deductible again whilst still having access to the money for use as a deposit for a PPOR. All without annoying the ATO..

 

It may be as simple as taking the offset $ and repaying the loan B. make sure there is a redraw on this first !! And check if a 100% repaymnets closes the loan out. If not ...... Iwhen you later redraw that (new) loan and use the proceeds for a deductible purpose its all fine. This is normal debt recycling.

Of course it also depends what you use the $$$ for. To buy income producing investments only.

When you redraw DONT PUT THE $$$ INTO A OFFSET if there is even $1 of other money there. The borrowed $$$ must remain alone and uncontaminated until used.

 

So to do this legitimately how would I do it with this setup?

IP B loan setup
1. Loan A - 115k - used as deposit for IP A (now sold so no longer deductible) - offset 100% currently
2. Loan B - 306k - main loan for IP B

would I pay down Loan A using offset funds, then redraw those funds into the attached offset, then what do I do? Do I transfer the funds from the Loan A offset account into Loan B directly? Can I then redraw the funds out of loan B?

the issue I see with this is I’m hoping to use the 115k in the offset against loan A as part of a deposit for a PPOR in the future. So ideally I want to make Loan A deductible again whilst still having freedom to do what I want with the 115k in the offset..

 

Loan Tip: What is Loan Recycling?

 

thanks Terry but I’m struggling to work out how to make that work in my situation as both loans are already secured against IP B

 

Depending on the lender it may not matter what the security for the loan is.

 

I believe in its simplest form that repaying loan A (assuming it has a redraw allowing full repayment) using the offset and then using drawing down a new loan A for a deductible purpose is a good example of recycling debt.

If offset funds are used this is NOT using borrowed funds. No resulting deduction for interest is available.

 

One of my clients didn't believe me when I said he could use his owner occ home loan to pay off his investment loan and save nearly $4,000 in interest per year yet still deduct the same amount of interest (less the $4k savings) so I got him a private ruling from the ATO.

 

Authorisation number: 1051526355187

 

Speaking with my accountant this week, but hoping to get some things to consider in the below scenario.
PPOR - 420k with 200k in offset (wifes name)
4 x IP held in wifes name
1 x IP held in husbands name

About to purchase IP 500k plus costs releasing equity from IP in husbands name

Is there a way to recycle the money from the offset through this, even though all required funds for purchase are being financed by equity release and new loan?

Thanks all,