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Strategy to Reduce Tax Deductible Debt

Discussion in 'Accounting & Tax' started by BKRinvesting, 16th Dec, 2015.

  1. BKRinvesting

    BKRinvesting Well-Known Member

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    I'd like to run a hypothetical situation past the experts here, I'd like to know if there are any flaws in my thinking.

    PPOR Value $1M, Loan 500k. (This is hypothetical, I don't have a million dollar PPOR yet ;) ).

    Let's say I withdraw $100k from my PPOR loan to fund a subdivision project, this is done using a separate split. This $100k split is a tax deductible loan, while the original 500k is not. The subdivision project is completed and both lots are sold for a profit of say, $50k after tax.

    Say this $150k (i.e. $100 + $50k profit) is then paid into the $500k loan, leaving a $350k non-deductible loan and $100k deductible loan. I withdraw another $100k split from the home to complete another subdivision project that nets another $50k profit after tax. I again pay that into the non-deductible original loan - reducing it from $350k to $200k.

    What this now means is that I have effectively changed my loan profile from $500k non-deductible, to $200k non-deductible and 2x$100k deductible loans secured against my PPOR.

    Is this a correct way of thinking (similar to a debt recycling strategy I guess?)
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    When you sell your subdivision you no longer have a reason for that portion of the debt to be deductible.
     
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  3. BKRinvesting

    BKRinvesting Well-Known Member

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    Ahh.. I see the flaw now.. Wonder if there is another way I could do it...
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    There are ways to debt recycle, generally speaking it's when you used debt to pay for deductible items like property costs, and use the cash you would have used to pay down your PPOR. Best to get advice from your accountant if you wish to implement any strategies like that.
     
  6. BKRinvesting

    BKRinvesting Well-Known Member

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    Thanks,
    Seems it's back to the drawing board.

    So just brainstorming, a better hypothetical option would be something like this:
    The subdivision project results in a 3 way subdivision, of which 2 are sold and the remaining is retained and rented out (with a mortgage against it).
    Let's say this frees up $100k after taxes. I could then use this to pay down the PPOR loan while retaining the $100k split as tax deductible as the home is still producing income (i.e. the property will likely be very negatively geared due to the 2 loans that were used to purchase it), but would result in a reduction of non-deductible PPOR debt.
    e.g. would look like this:
    PPOR debt:$400k non deductible + $100k deductible
    Subbed-IP: $Xk.

    Then I could theoretically rinse and repeat?

    Thanks Jess, Yes I'm aware of these strategies (I can thank this forum for that) and will likely be looking to implement them down the line - but I was interested to see whether it could be done on a larger scale. My IP running costs would hardly make a dent on my PPOR debt.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Nope.

    You have sold 2 of the properties which related to that money borrowed for the subdivision so only 1/3 approx of the interest would be deductible.
     
  8. BKRinvesting

    BKRinvesting Well-Known Member

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    Ah, yep ok.
    Seems, the cleanest and possibly best way is just the standard - sell off the lots. Pay of all related debt, and park the remaining cash in an offset against the PPOR ready for the next project.

    Thanks for all your help :)
     
  9. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Before using offset funds for your IP purchase, you'd be better off paying down the PPOR, splitting the loan and redrawing out of the new loan split.
     
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  10. BKRinvesting

    BKRinvesting Well-Known Member

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    Ok so:

    I'm guessing this is just in case in the future I decide to hold a project instead of selling up?
     
  11. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If your plans change and you sell two instead of all, the loan/s relating to that one remaining unit will be deductible. If you sell the whole lot it makes no difference but plans change all the time so best to be set up for maximum flexibility.
     
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  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Buy subdivide sell, pay down PPOR debt and then reborrow to repeat.
     
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  13. BKRinvesting

    BKRinvesting Well-Known Member

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  14. jrc

    jrc Well-Known Member

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    Most people want to increase deductible interest debt and reduce non deductible interest debt. You want to reduce deductible debt.