Tax Tip 219: Debt Recycling v Borrowing Extra to Invest

Spouse A should still split, otherwise they will have a mixed loan.
Spouse B should borrow to invest without contaminating the funds as well.
All the normal rules apply.

 

Thanks

Who do you suggest i talk to regarding the setup? Lawyer or tax agent? will they give me instructions on what exactly do to ? so that when i do get a knock on the door from the tax auditor, i dont have to escape from the back yard entry jk

can i do this myself? i just am not comfortable with setting up a trust. Thinking of just setting up a loan agreement with the my spouse.

 

If you want tax advice see a tax agent or a tax lawyer
If you want legal advice, such as trusts or loan agreements etc, see a lawyer.

 

cool. Thanks

and thanks for Tax tip 340 That makes it clearer

 

No. Not the "payments". The interest they accrue as income charged to the borrower is assessable. They will also have a potential deduction for the cost of the borrowed money. This may be the same rate or different.

See my post on the accounting problem. It helps to confine the one issue to one thread, not two.
Tax Tip 340: Borrowing When the Money will be Used by Someone Else

 

Is debt recycling and borrowing extra to invest still tax deductible when the PPOR is in your personal name but you want to invest throught a unit or discretionary trust?

Say you split 200k from your PPOR loan and then gifted that to a trust that you control to invest. Maybe it works for a unit trust where you own all the units but not for a discretionary trust?

 

If you set it up correctly the interest could be deductible.

I have 2 relevant tips on this, or more

 

Interesting. Are they in your tax tips section? If you loaned it to the trust then that'd also be ok but that's a bit of a hassle every time to do so.

 

The security doesnt impact what the loan is used for OR if its deductible to that entity. However a onlend loan agreement may be required. Not addressing that "gap" may mean interest isnt deductible. Easily planned. You DONT gift to the trust. If you do the interest is non-deductible and it cant be fixed.

eg Fred borrows from bank using equity in a IP. He borrows at 3% for investmnet use. His plan is a discretioanry trust which owns some shares will buy a IP. The property loss will be offset by the share income. Fred lends to Fred Investmnets Pty Ltd which is ttrustee for that trust. The written terms mirror that of Freds own loan including rate. The funds are settled and are used to buy the trust property.
- Fred will have interest income (from trust loan NOT a income distribution) and interest outgoings (to bank) which offset and have no tax issue
- The trust will incur interest (paid to Fred) and make loan repayments and claima deduction against its rent income

 

Tax Tip 89: Borrowing and onlending Interest Free to a Discretionary Trust Tax Tip 89: Borrowing and onlending Interest Free to a Discretionary Trust


Tax Tip 340: Borrowing When the Money will be Used by Someone Else Tax Tip 340: Borrowing When the Money will be Used by Someone Else


Incorporating a Trust into a Strategy Recycling Debt Incorporating a Trust into a Strategy Recycling Debt

 

Great topic and info

Currently, I am at a stage where we can pay off all the loans and can be debt free by selling our IPs and share portfolio....that means PPOR/Family home no loan and then we can start again the investment journey. But we be up for good CG tax as we still work FT.

Other option is to refinance as very low P+I IRs and pull more equity to invest and increase the debt with tax claimable component!!

Decisions decisions decisions

 

Just because you can do something doesn't mean you should

 

Hi Terry,

Example:

Homer buys property $800,000 (KDRB Project).

Homer sets up the property as "PPOR" to secure lower interest rate as serviceability allows. As well as CGT exemption (6years rule)

Homer Borrows $640K.

Homer Splits the loan to:

-Loan A $250,000
-Loan B $150,000
-Loan C $140,000
-Loan D $100,000

Construction at $700,000

He applies for the Construction loan $560,000

He pays Loan B down with savings then redraws the $150K out for deposits and expenses.

Upon Completion Homer lives in it for 6month.

When he moves out and turns the property into Investment property, now his total interest deductible is $640,000 + $700,000 = $1,340,000.

Is this correct?

Cheers mate

 

You are asking me for tax advice. Based on the above all I can say is not enough info

 

Thanks for getting back to me.

From what I understood is that borrowed fund used for investment purpose is tax deductible.

So based on this I thought by paying back the existing loan B with savings and redraw it for the construction deposit would be it?

Please let me know what specific info you are looking for.

Cheers

 

Sorry I forgot to mention, usually this sort of strategy involves two different properties.

I was wondering if this can be done with one property, which settles on the land first and redraw from the land loan for the deposit of the construction.

Sorry not sure if this makes sense.

Cheers

 

I am not sure what you are asking, but you could debt recycle against property during construction, or even before construction.

Seek specific tax advice.

 

This is borrowing

this could be done by debt recycling

 

thank you @Terry_w but not exactly what I was referring to...

 

Hi terry, correct me if im wrong

Loan A should be 300,000 with 50,000 in attach. Other wise how it became from 300k from 400k.

It doesn't make sense to me