Tax Tip 4: Borrowing to Pay investment expenses

This is a great tip. Except if you only have limited LOCs and want to save them for deposits?

 

If you only have cash for deposits you would be better off paying down non deductible debt and reborrowing it via a new split.
See
Tax Tip 9: Don’t use Cash in Offset account to Invest
https://propertychat.com.au/communi...nt-use-cash-in-offset-account-to-invest.2355/

 

I was talking about LOCs. Why use LOCs for paying expenses if it's going to chew up money you could be using for deposits.

 

Oh, yes. It depends on the situation.

By borrowing to pay expenses you would be freeing up the same amount of cash you would have used to pay these expenses. So this cash can be used to pay down the non deductible PPOR debt.

You will actually have more money for deposit because of the extra tax deductions.

 

Ok thanks Terry. And for being generous with all your knowledge.

 

I hate to see people losing money unnecessarily.

 

The only risk at the moment is that you use your LOC to pay investment expenses and then due to difficulty in withdrawing equity in current lending environment, can't recycle non deductible debt from your PPOR?

 

Yes that is a risk. If your loan has redraw you could take money out again, but you will have a split loan - but this could be unsplit later.

For a new strategy to get around this problem see
Tax Tip 13: Simple Loan Structuring Strategy
https://propertychat.com.au/community/threads/tax-tip-13-simple-loan-structuring-strategy.2601/

 

@Terry_w, your advice would be a separate "expenses" loan split per property to keep it clean come tax time?

 

Ideally have a separate split per property for expenses. This is in addition to the main loan per property

 

Yep, makes sense.

I imagine the only issues with having a single split for "expenses" and paying for multiple IP expenses from it would just be the tax-time mess it would create tracking what was for what?

 

It would really be a mixed loan. If all property owners are the same there would be no immediate tax issues if you apportion it wrongly. But if a property is sold the expenses for that property can no longer be claimed so it would be easier to pay out the expense loan for that property if it was segregated.

See Tax Tip 3: Mixing Loans - Don’t do it https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/
And
Legal Tip 15 An issue with mixed purpose loans where both portions are investment.
https://propertychat.com.au/community/threads/legal-tip-15-an-issue-with-mixed-purpose-loans-where-both-portions-are-investment.902/

 

Sorry guys, how is this additional borrowing done? let's say if i have an IP and borrowed 88%+LMI how can use this method to pay for my investment expenses? Do i just ask the bank to loan me more money? I understand the theory that if you keep the rental return as cold cash as well as not paying the expenses from your offset account as this gives you more cash @ hand which can be used for other investment purposes.

 

Usually borrow from a LOC against another property.

 

Hi Terry,

Can i use my borrowing to pay for stamp duty, building expenses etc during purchase and still claim deduction?

 

Borrowing to pay investment expenses can be deductible. This includes capital expeses such as stamp duty

 

@Terry_w if I borrow to do a reno/landscaping immediately after purchase and if those expenses are not considered repairs/maintenance can I still claim interest on those?

 

OK, looks like the interest on money to finance renovations is also tax deductible. Nice.

https://www.ato.gov.au/General/Prop...ntal-properties---claiming-interest-expenses/

 

Tax Tip 38: Interest on Construction of an investment property https://propertychat.com.au/communi...-construction-of-an-investment-property.3890/

 

Yes interest can be deductible on funds borrowed and used for the investment property - whether repairs or improvements or for ongoing expenses. See the warning in my first post