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Tax Tip 4: Borrowing to Pay investment expenses

Discussion in 'Accounting & Tax' started by Terry_w, 18th Jul, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Borrowing to Pay investment expenses


    Following on from the tip on debt recycling, one other variation is to borrow to pay expenses. Here we will talk about expenses other than interest (a topic for another day).


    If you own an investment property there will be thousands of dollars in expenses to pay each year. These expenses may include:

    • rates
    • insurance
    • water
    • cleaning
    • repairs
    • biocycle sewerage maintenance
    • strata
    • etc

    Say these all amount to $3,000 per year. If you pay these out of your pocket that is $3,000 that comes out of your non deductible home loan or offset account attached to non deductible loan (assuming it is not paid off). That means more non deductible interest must be paid.

    Instead of using cash to pay these expenses it may be possible to borrow to pay these expenses. If you borrowed $3,000 at 5% that is $150 in interest each year you must pay. But it is not $150 in additional interest as the $3,000 you would have used can go off the non deductible home loan. This means the overall interest bill is the same.

    The real benefit will be in the tax savings. If you are on the top tax rate the tax savings will be about $70 per year in the first year. That is $70 extra you can pay off your non deductible home loan in year 1.

    Not much you may think, but imagine you had 10 properties. Imagine the compounding effect over 2 or 3 years - or 30 years. Expenses also generally increase with inflation and as things wear out the repair costs become larger.

    Some people take action to stop the property manager paying these expenses out of the rent. The more you pay yourself the more you can borrow to pay.

    Also these expenses could be paid with a credit card which gives you points. More points means more rewards (just make sure the benefits outweigh the fees).

    However there is a trap with credit cards - see a future tax tip on this. If using a credit card you must be careful not to mix expenses on it.


    Warning - This has all the marks of a ‘scheme’ with a dominant purpose of increasing tax deductions. Don’t implement this without professional tax advice. Members of the ATO have indicate they are looking into this, but there are no ATO rulings which warn against it so far that I know of.
     
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  2. Be Developer

    Be Developer Property Developer Business Member

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    Great post @Terry_w

    We did exactly same for development properties expense and it save decent money at tax time.
     
  3. poeter

    poeter Active Member

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    Typically is this borrowed from LOC or split loan?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Either as long as you can pay direct from the loan without any detours.
     
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  5. orangestreet

    orangestreet Well-Known Member

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    Great post Terry. Any other forum members currently borrowing to pay IP expenses (apart from Be Developer)?
     
  6. Coota9

    Coota9 Well-Known Member Premium Member

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    Yes
     
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  7. ross100

    ross100 Well-Known Member

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    Is this feasible if you have just one IP
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Its feasible for half an IP!
     
  9. Rixter

    Rixter Well-Known Member

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    I've been doing it for 15 years via investment loc's. It increases cash flow and's cheaper to use OPM than my own.
     
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  10. orangestreet

    orangestreet Well-Known Member

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    I am guessing you could have as many split loans against your PPOR as as your bank allows?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, but you only need what is necessary. A different split for a each property would be enough generally.
     
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  12. SimonKia

    SimonKia Active Member

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    So put simply, you stand to save the expenses multiplied by the interest rate multiplied by your marginal tax rate.
     
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  13. bonanzawealth

    bonanzawealth Well-Known Member

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    Can't wait to see this tip on using Credit Card to pay expenses
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thanks for the reminder. I forgot about that one.
     
  15. bonanzawealth

    bonanzawealth Well-Known Member

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    with great knowledge comes great responsibility. I like all your tips, Terry. Thanks for sharing
     
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  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  17. Fargo

    Fargo Well-Known Member

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    Yes I am surprised any-body does it any other way.
     
  18. Fargo

    Fargo Well-Known Member

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    I pay my expenses from a credit card.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I am not surprised by anything I see these days. The majority of the investors out there are doing things wrong and are wasting thousands in extra tax. Its not always obvious to people.
     
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