Tax Tip 13: Simple Loan Structuring Strategy

Hi Terry, would I not be better off tax wise as my tax deductible loan is now bigger? or does this cause the 'mixing' issue you've been mentioning?

 

Moving loans around doesn't change deductibility of interest.

You would merely be swapping the security, but not changing the purpose or use of funds.

 

Does a loan with multiple splits cost more to set up when going through a big bank like CBA with the Wealth Package?

Also, are there monthly fees payable on each split loan?

 

No

 

Hey @Terry_w ,
I'm looking to now buy IP2.

Are there any tax implications on using funds from IP loan1, for IP2? (Like initial 1k deposit, BPI).
Do they HAVE to be kept separate, or is it just done to make it easier/cleaner come tax time?

Just wondering in case IP Loan Split 2 isn't setup by the bank quickly.
If they DO have to be kept separate, is it then possible to transfer funds from IPLoan2 once setup, into IP loan1 to pay for those funds? Or does this fall under 'reimbursing yourself'?

 

Yes there are tax implications. See my tax tip on comsequences of a mixed loan where both portions used for investment.

If you can find that tip reply here and i will post a link when i get to my computer.

 

Thanks Terry. I believe this may be the one you're talking about:
Tax Tip 54: Why Not to Mix Loan Purposes
I'll be sure to keep it all separate.
Cheers!

 

Thanks Mikey, I was actually thinking about this one:

Tax Tip: An issue with mixed purpose loans where both portions are investment. Tax Tip: An issue with mixed purpose loans where both portions are investment.

 

Brilliant, thanks Terry. That is 100% clear for me now, and know exactly what i need.

 

Hi All and thanks for Terry for this post and all your helpful advice to the boards,

I am a long time reader (starting with the Somersoft forum), first time poster.

Reading these boards has helped me into my first forays into property investment.

This thread (and Tax Tip 36) is on point with how I have structured my finance and leads me to the following question.

I have structured my loan as follows:

Loan 1: secured against PPOR (IO LoC with global limit between all subaccounts) (interest rate 4.09%) - Equity of approximately $200k available to fund new investment property or other purposes.
Subaccount 1 of Loan 1: non-deductible debt (remaining debt on PPOR)
Subaccount 2 of Loan 1: used for 20% deposit and purchase costs of IP No 1.
Subaccount 3 of Loan 1: for use against future IP No 2 when I find it (will draw on available equity for this purpose).

Loan 2: secured against IP No 1 for 80% of IP value (IO loan - interest rate 4.41% - redraw available)

These loans are not cross-collateralised and I have all rental funds paid into Subaccount 1 of Loan 1, so I am paying off non-deductible debt first. I make minimum interest payments for Loan 2 and Subaccount 2 from Subaccount 1 so that I am not capitalising interest. I will be taking on board one of Terry's tax strategies re. debt recycling to pay investment expenses from that investment loan.

My Question:

Given the interest rate is lower for Loan 1 (4.09%) than Loan 2 (4.41%), is there any issue if I use the available equity in Loan 1 to draw down on Subaccount 2 to pay $200k off Loan 2, and according save .32% in interest?

ie this is a reverse scenario of Tax Tip 36 but with the same underlying principles.

The total loan amount and investment purpose remains the same, it is just the security that is changing. My reading of the situation is that this would be possible as I am not mixing loan purpose.

When I am ready to purchase my next IP, I could then redraw the extra $200k I paid in to Loan 2 to pay down the $200k on Subaccount 2 and free up equity on Loan 1without any contamination.

Am I correct in my reading of this or is there something I am missing?

 

That is not a good set up Choo man. Why not convert the non-deductible debt to a term loan and get an offset?

Yes you could possibly borrow from 1 to pay off 2 - but get some tax advice first.

 

Thanks Terry,

The reason we have the non-deductible debt as a LoC is that we may need to use some of the equity to fund renovations (and we previously used some of the equity to assist the in-laws) so the quantum of the term loan may increase and we wanted some flexibility in that regard. If we we were to have a term loan for the non-deductible debt, then that would increase the number of loan products we were running would it not? As we would be running a term loan for the non-deductible debt + a LoC for the deductible debt secured against PPOR + the loan for deductible debt secured against IP No. 1.

 

It may never become an issue but if you were to ever rent the property out or claim the interest the loan is mixed purpose so there wouls be tax issues.

 

Btw i have written a tax tip on why not to use a loc as the main loan.

 

Cheers Terry, I am an avid reader of your tax tips but must have missed that one, but then again, your posts are so full of info it takes a while to digest their totality. I'll keep reading. We are planning on killing any debt on the PPOR long before (and if) we ever rent our PPOR out. We have a stack of equity in it and not much owing, so potentially claiming interest on the balance is not an issue for us.

 

NAB(broker) doesn't charge an annual package fee so up to 3 splits you are at break even as most of the other lender s who do packages charge circa $400 / annum for the privilege.

 

Sounds lime it wont be an issue then. But once the nondeductible debt is paid off you will need an offset account to put your cash in.

 

Had been focusing on getting nondeductible debt paid off ASAP and had not turned my mind to how I should structure once I had done this. Helpful advice as always.

 

@Terry_w any harm in setting up one big LOC / equity loan to use solely for investment purpose for multiple properties?

Also what about considering a lender who alows you to create splits post settlement without application ala AMP and St George?

I do understand the reasoning with your OP and is very good advice in the current credit market.

 

There is a tax tip on the issues of one loc with multiple purposes.

But it can still be done. Using one of those lenders that allows multiple splits is ideal. I like amp. Westpac and suncorp.