Tax deductability on loan

That could be possible. You would be borrowing to invest.

 

Yay! Thank you. This is what I have been contemplating to do. Leveraging funds via equity extract to invest. Maybe I didn't phrase it properly earlier hence the confusion for people. I'm just trying to find a legit way to claim tax deduction on the loan interest and to free up the cash I had earlier paid on the land ... in order to buy more income generating assets.

 

I think you are getting on the right track here.

 

thank you!!!

 

Just think if you borrow to invest in once producing assets the interest would generally be deductible

 

once producing assets ?

Say another situation of having an existing unencumbered established rental home, if the owner brings the title to a lender to use as security and asks for a 80% LVR loan to buy income generating assets ONLY. If the buyer qualifies for such loan then the interest on this loan would also be tax deductable right ?

 

Bloody autocorrect.

Income producing assets

 

Possibly.

1. Depends if the new and old loans are split. Apportioning the single loan into two different purposes can have adverse outcomes esp over time. Plenty is said here about errors and issues with blended loans
2. Depends if the new purpose is not tainted by mixing with other money etc eg draw down new loan, credited to offset which holds other money or to savings etc.... May be partly or 100% non-deductible

 

No I don't like mixing draw down loan with money in offset. Too messy and causes issues with tax deduction. I always keep them separate.
And only use my own cash in offset for personal purchases whilst draw down loans for (income yielding) investments.

 

My broker says a lender that would lend me construction loan offers redraw facility during construction period but not offset. This would allow the funds to be drawn down in multi stages during construction to pay the builder. I've asked if a separate offset account could be requested to hold cash in there during the build process in order to save on interest but they have said no. However they do allow the borrower to park their cash into the redraw facility to fill up "the gap" to the loan limit - saving interest.

Since I am doing this to minimise loan interest -and no interest deduction will be claimed- during construction period. Once the construction is complete the extra money deposited into the redraw (my aforementioned parked cash) will be taken out for personal use.

When occ cert is issued/tentant found I will refinance the entire construction loan with the same lender to be a normal loan on the new established home (same amount, like-for-like, just different loan type.) At this stage interest on the new loan shall be tax deductible on the IP .... Does this sound like a legit plan ?

Would appreciate comments on any flaws which I might have missed

 

You cannot park money in a redraw account - only pay down a loan. When you redraw that money it is new borrowings for tax purposes so you will have the same problems as outlined in your first post.

 

Taking money for personal use is non-deductible. Refinancing this later means its still blended between the non-deductible and deductible use.

 

oh ok, so this won't work then. Thanks for letting me know. I was trying to find some possible & legit ways to minimise the interest on construction loan during the construction period since it is not deductible.....but looks like it is probably not going to be possible without an offset account

 

It is a legit way to minimse interest, but not a legit way to save tax.

 

I was trying to achieve both ....
but going down the above mentioned path will probably void my eligibility to claim tax deduction on the loan post construction period then ...which will cost me way more than the interest bill during the construction phase

 

Most lenders will want you to spend your $$$ before theirs anyway

 

Paul raises a point that you might not be aware of. So if the construction cost is $100k and the bank is funding $60k they will get you to pay the builder in stages your $40k until it runs out then they will take over making the payments

 

Hi Westminster, I don't quite get the above. In my case the land is unencumbered and the lender will fund 100% of the construction cost. So the construction loan will just be the total build cost, say 100K if this is how much it costs to build the home. Loan will be in the form of a redraw account. Payment will be in multiple stages deducted from this redraw until it hits $0 at the final stage. Going from $100K to $0 etc ... Interest will be calculated on the money taken out to pay the builder etc..

Is this what you meant ?

 

In this case they might lend 100% for construction