Tax deductability on loan

It'll just be a re-draw ...would second tier lenders also be difficult with this ?

 

A loan from a related party. A parent, other family member, company in which you own shares etc.

If structured right interest can be deductible when you refinance with a bank later on.

 

It won't be redraw if you are paying cash and borrowing later

 

I like to describe the cash issue this way

You walk into JMart to buy swim wear. You pay cash. You then walk out later thinking about using borrowed money. You walk in and ask if they can just put the money on a card. Nahhhhh not going to happen. You paid, you own it and cant even exchange it. You cant fix that.

You cant borrow to pay for something you already have transacted without a third party unwinding the former matter. In some cases they wont want to co-operate.

 

if I paid cash and the lender holds the security, then extract an 80% LVR loan on the IP for other investment purposes...wouldn't this be considered a redraw ?

 

Thanks Paul for clarifying. However if I pull equity out of that asset via a bank to use for subsequent investment purchases then the interest charged on this equity loan is a legit tax deduction right ?

 

Do yourself a favour and pay for some specific advise from a professional before you cost yourself thousands.

As for the comments regarding lending when construction has already started, I've done this before for clients - as long as everything stacks up and done through builder, shouldn't be a problem. But would be doing this ASAP

 

Depends. Not all use of funds produces a deductible purpose.

 

Tip - Interest on this type of loan use IS NOT TAX DEDUCTIBLE after 1 July 2019 excepting a business of development construction and sale of new premises.

 

No

 

I guess the simplest answer is to just wait until you have your finance sorted before you start construction. Whilst you are working on builder selection, design, costings you can be finding the right lender for you

 

1st section was to get advise re; tax. More so about destroying all deductibility by using cash > borrowing to repay self.

2nd part was actually getting the loan.

 

thanks everyone for the replies. So to summarise the neatest solution would be: get a construction loan in place, pay non-deductible interest then once occupancy cert is issued refinance (and do a redraw to extract any equity available to use for future cash generating investment purposes) and this shall allow the interest on the loan to be tax deductible. Is this correct ?

I shall sort professional advise but just wanted to recap what was explained above by the members.

 

No need to refinance

 

refinance to extract equity from the unencumbered land (in order to purchase subsequent cash generating investments) and claim deduction on the overall interest of the loan. Is this legit ?

 

Not quite.

If you had a loan of say $800K at the end of the build and we will assume all $800K funds the land a construct lets say. When the construction cert is issued and the premises are available for lease (ie both limbs) then the interest deductions commence. Up to that point they are part of the construction costbase. However any increased borrowing due to equity release will NOT be deductible. That additional borrowing would need to satisfy a new purpose and the use of the new borrowing will require review of the use of the borrowing before it may be deductible.

eg Refinance and equity out of $1.1m
$800K is a refinance. Deductible assuming the former dev is being kept to rent. $300K is new borrowing. If it is used privately it is not deductible. If it is used to buy a new lot to strat a new build it is also non-deductible since it is undeveloped land and cant produce income until a new build has been completed AND an new occupancy cert issued for that new site. If its partly used for acquiring investments then the $800k portion of interest will offset the rental income and $300K will offset the investment income assuming all of it pays income. If your $300K of investmnets included shares that pay divs of $100K and $200K to buy shares you expect to sell at a profit then 1/rd is deductible v divs and 2/3rd is a CGT cost.

 

You are continuing to confuse LOAN SECURITY with use of borrowed money. The USE determines its deductibility.

 

I thought you were encumbering the land when you borrow to construct

 

Let me rephrase. What I meant was:

Say land costs 40K unencumbered, build costs 30K hence total construction loan is 30K (loan interest here is not deductable till occ cert is issued.)

Total cost of the IP is 70K. When occ cert is issued the construction loan then gets refinanced to a normal investment loan (for better rates) and say If the lender now values the property at say 100K then the loan on the IP is 30K at 30% LVR with interest now being tax deductable.

Another redraw or equity pull of 50K in a split loan (bringing total LVR to 80%) is created to buy income producing assets ONLY (say shares that pay dividend or funds to be used as deposit for subsequent established investment homes) then the interest on this loan will be tax deductable as the "Purpose" of the loan is to buy income generating assets.

Correct ?

 

Thanks Paul, I understand what you say but the above scenarios are not what I'm planning to do.