Tax Tip 13: Simple Loan Structuring Strategy

Discussion in 'Accounting & Tax' started by Terry_w, 8th Aug, 2015.

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  1. Unyonion

    Unyonion Member

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    Hi all,
    total newbie to forum & investing ;) , Terry_W love your tips, read so many and 'think' I have a handle on my first IP's loan structure... (hoping any holes can be poked with your, and others finance sticks)

    Plan is to keep new IP for extended period, debt cycle and purchase more IP's over the next few years, PPOR is not likely to become a rental.

    Currently have PPOR at $660k, sitting at $356k in P/I loan, been overpaying approx $2.5k per month which is no problem for servicing and just had offer accepted for $425k on IP.

    Based on my understanding from your 'tips' posts splitting loan to:
    PPOR I/O or P/I $356k with offset
    IP Loan I/O $172k - to be used for 20% deposit, Stamp & purchasing costs ($101k) and then ongoing expenses (water, rates etc.) and then deposit on next IP.

    separate I/O loan of $340k to cover 80% borrowings on IP.

    So done a diagram as I am a visual learner

    Then ongoing does the secondary section on the diagram for payment of expenses etc. work?

    Does this make sense or am I better to make more splits for each purpose? any glaring errors? hoping my hours of trawling posts has entered my skull :confused:
    Cheers, Mark
     

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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I replied to this one over on the other thread:
    Investment Structure?

    You need specific tax advice as well as credit advice.

    Broadly speaking yo would want to borrow for investment related expenses and keep all cash in an offset account attached to the non-deductible debt and aim to get investment debt over to owner occ rates.
     
  3. Gypsyblood

    Gypsyblood Well-Known Member

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    You are a GENIUS!!
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I know!
     
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  5. Poon

    Poon New Member

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    Hi Teeryw,

    We are in the process of buying IP 2 :
    1. PPOR:
    Loan balance: $379,000
    Redraw: 215,000
    Equity: $200,000

    2. Investment property1:
    Loan balance: $265,000
    Equity: around $100,000

    We want to use the equity to buy the second IP around $ 865,000
    Not sure which equity to use first PPOR or IP1?
    What should be the best loan structure?
    Please help us
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  7. Poon

    Poon New Member

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    Thank you Terry. I like the read.

    I have a few questions
    Assuming I will be using PPOR equity ( I think it will better at this stage)
    1. Do I ask the bank to release all the equity at once or only pull out exactly what’s needed depending on 10 to 20% deposit for IP? So that rest I can use for next IP purchase with another spoilt loan.
    2. Loan A : No change PPOR
    3. Loan B: Split loan for investment purpose (equity release)interest only with 100% offset or not ?
    4. Loan C (IP) Investment purpose interest only borrowing 80% -90% with an 100% offset account right? Or redraw account?
    Also, interest only loan repayments ( both IP and split loans) will come out of PPOR offset account as all you income is going into there, right?
    Need you input here. Thank you
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    See my latest tax tip
     
  9. Poon

    Poon New Member

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    Hi Terry,
    I didn’t find related tips? I would really appreciate if you help me here and give your suggestion. Need your guidance so that I don’t make a big mistake. I will be talking with bank tomorrow.

    Thanks
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Become a client if you want specific advice. It's all outlined in my tips otherwise
     
  11. Poon

    Poon New Member

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    Hi Terry, How to become a client ? Thanks
    Please send me the info
     
  12. yrashidi

    yrashidi Member

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    Hi,

    I've read as much as I could and many thanks for providing this info. I'm still not clear and I hope you don't mind me explaining our circumstances and asking about the process:

    - PPOR $570K loan with Redraw (P&I)
    - 100% offset account with Redraw - $70K savings
    - Lender: Pepper (connective solutions)
    - No credit card

    We want to buy ETFs, but arrange debt recycling so we can claim interests in tax deductions.

    Q1: Is it possible to do debt recycling with our current loan arrangements? (Not getting a loan split or Line of Credit).

    Q2: Our loan broker seems to think in order to achieve what I want(debt recycling) we have to apply for a new loan/refinance! Which seems wrong to me. What is the best solution for us? Split loan into two parts, $70K+$500K. Completely pay back the first part and then redraw into my stock brokerage account?

    Q3: Should the loan split we get be interest-only?

    Thanks in advance
    Yaser
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You should seek tax advice
    1. yes
    2. no
    3. it depends.
     
  14. yrashidi

    yrashidi Member

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    Terry,

    Thanks for your prompt reply. We just bought the house and our broker has a claw-back clause with penalties if we choose to change our lender in first 3 years. If it wasn't for this, I'd have happily switch to your services. I already talked to Tony, but because of high switching costs, I'm a bit reluctant to switch.

    I know you probably have explained several times, but would you kindly elaborate how to achieve this with current loan? Is it as simple as "Redraw from loan account into our stock brokerage account and buy the stocks with it". I know about funds contamination and won't redraw into savings.

    Regards,
    Yaser
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yrashidi likes this.
  16. yrashidi

    yrashidi Member

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    Thanks. Appreciate it.

    Yaser
     
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  17. yrashidi

    yrashidi Member

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    Hi again,

    I've split the loan(split1:$500K, split2: offset account, split3: $70K), moved savings from the offset acc. into investment split and currently have $70K redraw available in the 3rd split.

    A final question is: In order to do right by ATO regulations do I need to:
    a)literally repay the $70K to lender and then redraw. or
    b) it's okay to use redraw directly from split 3 into the brokerage account.

    Have a good weekend everyone.
     

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  18. yrashidi

    yrashidi Member

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    Hi, For other people's benefits who may have the same question, here's the answer:

    Well it depends. What has the current $70k loan been used for? If the $70k is fresh debt which you have just applied for and the funds are available to you, then you can simply move it straight into your brokerage account.

    If the $70k loan is existing and has been used for something else, you'll need to fully pay it down and then redraw, then invest it and it will become tax deductible.
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Moving it to your broker account is not what provides deductibility. It would be necessary to consider what the borrowed money was used to acquire from the broker account. It must be used to acquire income producing investments for example. Mere speculative investment would not meet the deduction test.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It might become deductible.

    You also have to be careful of fully paying down a loan. With many banks this would close the account and you would have to reapply again.
     
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