Tax deductability on loan

Inter st is only deductible after occupancy certificate issued and available to rent. But only where you borrow to construct

 

thanks Terry

 

what about security swap ?

Say if you own IP1 with 200K mortgage (claiming deduction on the interest) and own IP2 unencumbered...then you sell IP1, pay CGT and instead of paying out the loan you decide to keep the loan and use IP2 as security for the bank.
Would the interest on this existing loan (now with IP2 used as security) continue to be tax deductable ?

Thanks very much

 

What does the loan relate to? It was borrowed money used to purchase another property which no longer exists. Not deductible

 

i see, thank you .... gee and i was hoping to recycle my existing debt (and utilise leverage & tax deductation at the same time) on another IP that has not gone through its growth cycle given how hard it can be to get loans from the major banks nowadays....

Is there any legitimate way that deduction can be claimed on loan interest for security swaps ?

 

Yes
Sell property, substitute security so the loan remains open, repay loan money from proceeds of sale and reborrow to invest.

 

But this would require a full application re-assessment right ? Is there any difference from what you've just described to: "Sell IP1, pay down loan then reapply from scratch for another loan for another IP not yet purchased", from the lender's assessment perspective ?

Given how hard it is to get investment loans from the tier 1 banks nowadays...what are the chances of them approving the loan for subsequent IP after IP1 loan is paid down ....if one has already reached their borrowing limit and potentially not even qualify for the "loans they currently have" ?

 

no.
If the loan has redraw just pay it down and redraw it.

 

brilliant!!!! you're a genious... the exact solution that i was after! thank you sir !!!
but IO extension in this case would require another full re-assessment right ?

actually no, on second thought, this strategy will have low LVR on an IP .... it's like using one's own funds to buy an IP ... and not maximising leverage like usual of around 80% min LVR etc .... not very efficient use of capital..

 

Most builders wouldn't entertain this as they will require proof of funds (for the whole construction amount) or proof that the bank will give you the money. Their insurer will also require this.

 

thanks Westminster, i've never built before ...first time dabbling into this territory hence wanted to find out more about the options available etc,,,

 

I seriously doubt any builder or bank would agree to this arrangement.

What you could do, is pay for construction using cash (if you can fund 100% of build with cash) and then refinance to a bank and use the property as security once you have the occupancy certificate. Given that the funds are reimbursing yourself still doesn’t help with tax deductibility but does give you leverage and ability to use cash from refinance for other investments which could potentially make interest tax deductible on investment portion.

 

yes this was my exact initial plan ...but the draw back is the tax deductability issue ...

 

Perhaps the better option in the long run would be to wait and not start building until you can sort out your finance. If you own the land free and clear, your holding costs are minimal and the opportunity cost of waiting a few months might be much less than the cost of losing the tax deductible interest over the life of the loan.

if you have cash to build, what’s the problem with obtaining finance? Do you have a serviceability problem? You should be able to find a construction loan between 4-5% interest rate. After construction is done you can refinance to a lower rate and interest is still tax deductible.

 

Another problem will be the cash out restrictions too. If you pay cash then borrow it will be treated as cash out

 

Hi Terry, how different are the cash out treatments, tax or loan wise ?

 

Correct but the refinanced funds is only tax deductible if used for investment not for personal purposes such as buying PPOR etc...
Ideally I would like to have cash sitting in an offset account saving investment interest until I need to use them for non-investment purposes. The tax deduct ability will not be possible with redraw for this purpose.

I've only recently discovered that I still have more borrowing capacity with second tier lenders hence the sudden change of mind to build. The initial plan was to sell the land because I've already maxed out borrowing capacity with the tier1 banks....and would not use personal funds to accumulate IPs....

 

No different tax wise, but lenders will give you a hard time

 

Considered related party loans?

 

hi Terry, what's a 'related party loan' ?