Tax Deductible? Paying Off a Loan with a Loan

I take out loan A to purchase income producing assets. The interest on loan A is tax deductible.
I take out loan B to pay off loan A. Is the interest on loan B tax deductible?

 

Why would you take a loan out to pay out another loan?

 

Why not close out the 1st loan with the 2nd loan?

What are you securing the second loan against?

 

Yes. This is just a refinance. So if the interest on the original loan is deductible the interest on the new loan will generally be deductible.

The exception is if you are borrowing to pay interest.

 

Yes

 

Really? As brokers you dont know? Sigh....

 

Absolutely - that's the basis of refinances in general!

 

I think there is a niche for a new loan product in the market. (Maybe it already exists and i don't know about it?)

As there is a push to convert IO loans to P&I and a widening gap between rates on the two products, it would be good if there was a P&I loan which allowed each month for the interest payments to be drawn from one account and principle from another. In this way you could set up a small IO loan to make principle repayments, keeping your total debt level constant without incurring the penalty interest rates of having all loans set to IO.

Example: $1,000,000 worth of loans fully drawn set to p&i, and a small $100k interest only loan being drawn down each month to make principle repayments. After a few years P&I loan balance reaches $900k, IO loan fully drawn, total debt still $1M. Can this be done?

 

Tax Tip 46: Want to Pay IO on a PI loan? Tax Tip 46: Want to Pay IO on a PI loan?

 

Really ?

Did you miss your coffee ?

 

To avoid the cash flow required for negatively geared properties.

Eg 200k in equity release that you can take out from current property.
125k goes into deposit+stamps for 500k purchase leaving you with 75k
If your property is a few k negative after rent less costs each year, you may not want (or be able) to pay this out of pocket, so if you have it available from an equity release, this would be one way to continue investing without impeding your personal cash flow, and the amount needed would reduce over time as rental income increased so it should comfortably never need the full 75k.

I have often wondered if there is any problem with doing this. I saw it as an example in an article by one of the property couch guys, but have not seen it mentioned on here.
I believe it is called capitalising interest and sounds like there is a problem with doing that, although I have not yet gotten around to asking what the problem is exactly.

Yes I want this also.
The link by Terry doesn't say how to apportion this without causing possible problems since it is a problem knowing the exact amount each month that is principle and interest as it changes each month.
Although I am thinking that whatever the principle is at current day will only be more and more as each month goes by, so maybe if you are on a fixed rate, it could be worth calculating the principle as of current date and just making your auto payments be current principle amount from released equity and remainder coming from wherever it normally comes from...?

 

Tax Tip 16: Capitalising Interest Tax Tip 16: Capitalising Interest

 

Anthony, you can use it to pay costs, but not interest to pay interest or principal, well that is if you intend claiming the interest.

Most common loan to pay out loan is re finance, plain and simple, you can release at the same time for other uses, whatever that may be.

 

Why do you say this?

 

Well, you can do whatever you want, until your challenged or you find you did something wrong, I thought it was pretty clear that you cannot claim interest on any principal payments & borrowing to pay interest on interest is not too bright just from a common sense point of view probably for many, people doing this are skating on the edge possibly, better make sure you know what your doing.

If you are doing things like this, you also may want to ask yourself why exactly ? If you know exactly why, then your probably good, if you are unsure or say because you keep reading it on forum/s etc, then you may be digging yourself a hole.

This is not the reason most refinance is done I suspect.

 

What is clear is that you can claim interest on interest. High Court even said so in the Hart's case. However, the ATO may use Part IVA to deny the deduction in certain instances.

Just because someome borrows to pay interest doesn't mean they are skating on the edge. There are legitimate reasons to capitalise interest, it will just depend on the circumstances.

 

Yes, for sure, they may not be at all, and yes it may suit some well.