Tax implications of withdrawing equity in advance of purchase & temporarily keeping it in offset

Currently loan

split1 - 200k loan
offset - 100k

interest on loan is 5% of 100k = 5k/yr and it is all tax deductible

--

in preparation of next property, withdrawing 200k from equity into new split (split 2) and putting it into offset to avoid paying interest on the 200k until it is put into an investment, so it will look like

split1 - 200k loan
split2 - 200k loan
offset - 300k

Lets say it takes me 3 months to find an investment property to invest the 200k.

How would my tax deductions work during these 3 months?

My assumption is that if I just take the 200k from split 2 and put it into the offset to avoid interest, the 200k in offset cancels out the split 2 so there is no interest on that 200k and therefore no non-deductible money (same as if the 200k was not withdrawn) - and 100k in offset originally from the 200k of split 1 means I have interest on 100k from split 1 which is tax deductible - same as before I even had split2


If this is not correct, can you give me an example of how it would differ please
Aassume loan rate of 5% for simplicity if it helps to explain anything.

 

Yes. A tainted offset is a possibility. If the offset from the new loan and the old loan arent correct. I havent looked at your details too far.

 

I question if your strategy is the only one

 

Ah ok.

I was worried that since it there are 2 splits, that it would go to pay off half into each split and the remainder in split 2 was not tax deductible.

eg.
split 1 : 200k
split 2 : 200k
offset : 100k offset + 200k from split 2 = 300k

My concern is if half of the 200k from split 2 (or half of the whole 300k in offset) will go towards each of split 1 and split 2 and then the remaining of split 2 would not be tax deductible.

So then
split 1 : 200k - 100k (half of split 2 money) - 100k (orignially from offset) = 0
therefore no interest
split 2 : 200k - 100k (half of split 2 money) = 100k and interest paid on this is not deductible (?)

Did that make sense?

 

See my tax tip 1

 

From your tax tip:

Yes but I am not sure if there is any expense or not
how is the money in the offset apportioned to the different loan splits.

What if I withdraw no money in this 3 months and then the first withdrawal is the full and exact 200k for the use of investment?


Comment by @Paul@PFI as first comment in that thread:

So I should be asking them to put the new 200k from split 2 into a redraw to keep it separate from the offset?
This makes sense.
I will ask if they can offer a redraw as well as the offset.
Also if this can be taken out immediately or if it takes time and will be a potential hold up.

 

Redraw to the investment and later when u want to use the money repay into loan. And redraw directly to the final destination.

I can't guarantee the interest will be deductible tho

 

Is that because the redraw and offset are each attached to the 400k loan total and not to the 200k loaned from before or the new 200k taken out from equity which makes it hard to apportion which of the money in the redraw and offset goes towards which of the previous 200k loan and the new 200k loan?

So then, not mixing is one issue, but also then there is the issue of which of the 2 parts of the loan the money in redraw is attached to?

I think there is no solution to this then (that I know of) other than to have 2 entirely different loans (one for the original 200k, one for the new 200k) and a third loan for the new investment.

 

It is because of the detour the money is taking. Where you borrow to park in a savings account the link between borrowing and investing is broken.

You should split loans in any case to keep purposes separate.