Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement

It's not only about tax though is it? If I have cash to pay 25% of a purchase then borrow 80%, I could be left with no buffer. Or I could borrow 105% with an offset account and put my funds in the offset account. Then I have the purchase and the buffer. If anything goes wrong: vacancies, repairs, interest rate rises, it is much smarter to have a buffer than no buffer.

 

No. Thats just your position. The thread was about maxing the deduction, Many investors may not be borrowers at all or have a LVR or limited capacity.

 

I think you have missed the point of the thread

 

Not really. I was responding to a particular point of view.

Just pointing out that there are good reasons not to do this and it has nothing to do with tax.

 

The choice is with the purchaser.

Where they have paid a deposit with cash either mistakenly and unavoidably they may have some options to rectify the situation.

 

Hi Terry
Your tips are really helpful. I may have a tricky situation trying to keep everything in order.

We are currently buying an investment property through our Family Trust. The Family Trust will have a loan from the bank for 80% of the purchase price. For the remaining 20% (+costs), I have a loan from myself & wife to the Trust. To make this loan we recently extracted equity from another investment property in our own names with the extracted equity held in an offset account until now. No other funds are in the offset account.

To date I have only made a loan for the deposit from this equity extraction to the Trust to enable payment of the deposit. I paid from our account to the Trust to ensure asset protection but one possible issue i see from your tips is that the Trust only has one bank account so the loaned funds were deposited to that bank account which also receives income from other means.

My tax accountant seems comfortable with this arrangement for ensuring all of the Trust borrowings are deductible (80% loan and 20% + costs loan) and the net impact on our personal tax returns would be neutral (interest income on the loan directly offsetting the interest expense on the equity loan) but some of the reading I have done on here raises some questions.

What do you think re the above? Would setting up a separate Trust bank account be the answer to be used for the loan from us?

Thanks

 

If the trustees account has other money it would be a mixed loan. Similar to the domjan case. I have written a tips on this

 

You have a high limit. I can't trust my wife if that limit is so high. Haaaa

 

Yes, the Trustee account also has income in it. Ok, I will open another bank account in the Trust and ensure the remainder of the purchase price is lent from our offset account to this account with no other funds in it. From reading the details on mixed loan it is hard to tell if I can unscramble this egg! Given I have already lent $25k to the Trust account and used $20k of it to pay a deposit, is it too late to rectify this?

 

Yes prob too late.

 

Nah man multiple swipes can't afford it too

 

I'm confused sorry,

Are you saying that if you plan on paying a 20% deposit on a property worth 400k (80k) that you should not use the 80k you have sitting in the bank for your deposit but take a separate loan elsewhere to pay the deposit?

 

Ideally yes.

 

In a nutshell - why is this?

Simply because you can deduct the interest if you are negative gearing?

Cash flow positive not worth while then?

Seems odd as you are still loosing money.

 

Thats not the only reason - what about if some emergency comes up, better to have the cash in the bank to pay for those sorta things. Equity is great but might not always be there when you need it.

 

Not for that reason.

I think i explained it in the first post on this thread.

 

I know where fluid is coming from, as someone with no previous background on tax deductions, I struggle to get this concept as well. When I think I've got it, it seems to all fall apart again.

It just doesn't make sense to newbies here that if you got money sitting around, you don't use it but acquire more debt instead.


I've read this tax tips a few times and still I don't quite get it.


Terry in your example in post one, if you paid with your own money, you incur 0per cent interest, however if you borrow money, you incur $5000 interest expense, to get $5000 worth of tax deductions. This is not to say you get $5000 back, but only a portion depending on your tax bracket. So overall, isn't 0 percent interest better than any interest at all.

I see the benefit of having more cash on hand but there is something that I'm missing that's not quite geling together this.

 

If you borrow say $100,000 to pay the deposit that you would have paid with the $100,000 in your pocket you will not incur extra interest if the $100,000 you would have used is deposited in the offset account or paid down off the main residence loan.

Overall your equity position is the same, but you are just shifting things around by increasing debt and keeping the cash.

Later when you go out and need $100,000 cash you will be much better off by using the cash in your offset rather than having to borrow an extra $100,000

 

yes I think the key factor here is the offsetting which I don't think you mentioned in your tax tip. It may be obvious to the professionals here but for the newbies don't assume it is to them. ( I'm referring to me haha)

Initially this is what I thought you meant, but your example in post one about $5000 worth of tax deduction threw me off. I was thinking if it was completely offsetted, there would be no interest so how is there tax deductions. It's only when you later withdraw you cash so that you are paying interest that there is tax deductions to be had, but again your example assumes no offsetting since you imply there is $5000 in tax deductions wasted. In which case wouldn't it be better paying with cash instead as that will incur zero interest?

See I'm going in circles again. When I thought I understood, there is something not quite right.

So is the benefit in cash flow more than tax deductions.

 

maybe tip 60 covers what you are after:
Tax Tip 60: Never use cash to invest https://propertychat.com.au/community/threads/tax-tip-60-never-use-cash-to-invest.4883/