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

That may not actually be a great idea. If you borrow money to facilitate cash being refunded its likely a concern and your borrowed funds have just been used for a non-deductible purpose in a round robin scheme. The borrowed funds must be used to acquire a property through its deposit, acquiistion costs and final settlement.

 

totally agree that this not the ideal method but probably the only method for people who had to pay deposits with their own funds beforehand is from what i am understanding.

like what previous posts have outlined from my understanding, as long as the borrowed funds is used at final settlement, i.e. can demonstrate the purpose of use, it is likely to be ok? As more money will be put at settlement, then in theory, the dep originally put can be refunded back.

 

I'm not so sure of that logic. Just because monies are paid doesnt mean its money settled. I would argue the later extra paymnet is beyond the funds needed to settle and inconsistent with the contract which specified a deposit already paid. You cant refinance a deposit already paid and legally held. I have seen people overpay $$$ to the soliictors trust and the soliictor returns it...That element of the borrowing is not deductible too. Best repaid to the loan.

let me ask this....would the vendor allow a deposit by way of promissory note ? Then its likely to be deductible as a refinance. Good luck for a vendor agreeing to that arrangement. Often the deposit is relased to pay the agent and also to the vendor so it cant be refinanced as suggested. A deposit bond may be a suitable alternative. When the borrowing comes through the bond is exchanged for borrowed funds. Costly.

 

Hi all, lots of good info in this thread.

It seems to be a deposit bond is the best way to guarantee this (and then the full deposit + loan balance gets paid from investment loans).

My mortgage broker says I can pay deposit with cash and then on loan approval the balance can be paid out and my cash will be refunded to me. This seems to contradict what has been said here with the 'mixing' of funds. His logic was they are still both being used for investment purposes. What's the correct answer?

 

best not to ask tax questions to brokers unless they are licensed to reply.

You can do it, but will the interest still be deductible?

For the answer read this thread from the beginning and my tax tip on reimbursing yourself.

 

Thanks Terry

Still trying to wrap my head around this. Please bare with me.

Scenario:
I have a conditional equity loan approved (the condition is based on it being put to a new property), meaning I can't access the funds until it's approved and paid at settlement.
If I pay cash deposit (5%) and then use loan proceeds to pay 100% at settlement (Item 4 in your first post at the start of the thread), then my solicitor says the cash will be refunded to me (but out of loan proceeds instead of from the agents trust account).

Does this 'mixing' meaning I can't claim interest, even if they were both put toward the same investment property?Is there any other way around this besides a deposit bond?
Property is in VIC, where most agents and vendors dont like taking deposit bonds as it limits their ability to access it pre-settlement.

 

If you pay with cash there is no interest to claim.

Best to get some tax advice.

 

Hi All,

I recently paid for a 10% deposit on an IP using a cheque book attached to our PPOR offset account. We already have a line of credit loan against another existing IP.

We transferred the same amount of money (equal to the 10% deposit) out of our line of credit loan into our PPOR offset.

Given that the purpose of the funds was to ultimately to pay for the 10% deposit, is it valid for us to claim interest paid from the line of credit loan?

Thanks in advance ...

 

Nope.
You have already paid the deposit so you would be borrowing to reimburse yourself

Tax Tip 5: Reimbursing yourself - Impossible Tax Tip 5: Reimbursing yourself - Impossible

 

To be more specific, we transferred the same amount of money (equal to the 10% deposit) out of our offset attached to our line of credit loan, and into our PPOR offset.

 

that doesn't change my answer!

 

Thanks Terry....!

As we haven't arrived at settlement yet... how easy would it be for our lawyer/conveyancer to organise the following? I'd imagine its not very routine?!

"5.Don't use the deposit money in the trust account. At settlement use borrowed money from elsewhere to pay the vendor, not touching the deposit already paid. As this money is being held in trust it can returned to the purchaser after settlement."

 

Very

 

Hi @Terry_w

I have already made that noob mistake of paying 10% of the deposit to the agent from my offset account and now trying to fix that mistake because settlement is still one month away.

According to my bank, I am able to borrow more than enough from equity to cover 10% + expenses of this IP purchase, and can get the funds as a split loan secured against my PPOR. So I am thinking to have that done.

So borrowed funds would be available in two loans:

Loan A: Investment loan secured against the IP
Loan B: Top up (split) loan secured against PPOR

The total of the above two loans would be well above 105% of the purchase price.

I tried to explore going for Option 5 mentioned in your post above to fix the mistake of paying the deposit from my offset account. I contacted the agent to advise them not to touch the deposit during the settlement and refund it to me after the settlement. But the agent advised that they would not refund it as per the instructions received from the vendor's solicitor, and would hand over the deposit to them after deducting agent fees and commissions.

I asked my conveyancer to not use the deposit for settlement and instead use only borrowed funds from the two loans above, and I was told that they would do that and deposit surplus back to my nominated account.

I have some question:

1. If the agent is going to release the deposit directly to the vendor or their solicitor only, then that much amount would never be drawn from the loans for settlement and will reduce the tax-deductible borrowing by that much (10%). Is that the correct understanding?

2. Is there any way to correct this mistake without involving the vendor's agent (i.e. instructing my conveyancer and/or bank to process the settlement in any specific way).

3. If I borrow 105% in two loans combined, and then end up with a surplus due to the deposit also getting released towards the settlement, then the bank would deposit all the surplus into a nominated account (not back to the loan). Would it create any contamination/mixing issue? Based on your tax tip 1, I think this could be an issue. How to handle this?

4. If it's not possible to rectify the error now without having to involve the agent, then is it worth tapping into the equity just to cover the costs (stamp duty and buying expenses) of ~$17000? Or preserve that as a potential borrowing capacity for the next purchase?

5. (this is a more generic question) By using money from the top-up loan, the interest would become tax-deductible, but at the same time, it will introduce an additional repayment which wouldn't be a case if equity is not accessed. Also, the interest rate is a bit higher on top-up loans compared to PPOR loans making the difference between the two approaches negligible. So if someone has sufficient cash+buffer, how much beneficial it really is to go through the hassle of accessing equity and all?

 

You should seek your own legal advice.

 

Considering I have paid the deposit from my offset to the agent, I am pretty sure that there will be surplus funds available at the time of settlement because 105% of borrowed money will also become available for settlement (115% of the purchase price would be available for settlement).

Should I get the surplus back to the offset account linked to my PPOR, or should it go back to the offset account linked to the top-up/split loan and then pay it back to the loan account? I would like to receive it in the PPOR offset account and keep it there to maximise tax deductibility. Is that an issue? If yes, why and what can be done?

My bank has advised that they would draw down both the loans (investment and top-up) to their max limits and then deposit any surplus to a nominated account (could be the offset linked to PPOR or the offset linked to IP). They cannot put the surplus back to the loan account!

Please advise in which account I should receive the surplus. Thanks a tonne in advance.

 

All surplus borrowed funds should be repaid to the offset or loan where they came from. Its always wise to understand your redraw rules and limits. Lenders cant stop you repaying a loan

 

Example
Bart pays $10,000 deposit to the agent. and Borrows $80,000 from a bank mortgaging the new purchase and $10,000 from a different loan secured against other property.

At settlement Bart has to transfer the $10k from his other loan to the solicitor trust account. The agent will pay the deposit to the vendor from the agent's trust account.

Instead. Bart instructs the agent not to pay the deposit over to the vendor, but he borrows $20,000, instead of $10,000 from his other loan and puts $20,000 in the solicitor trust account.

At settlement the $20,000 is paid from the solicitor trust account and the bank mortgagee pays $80,000 to the vendor.

a few days later the agent returns the deposit to the purchaser.

 

I am seeing more and more people make these sorts of mistakes. Please get some tax advice before you pay the deposit on a property, especially an investment property.

 

Worse still...ATO are seeing more and more of these issues. Many think they wont check. They do. They go back to day one. I have seen clients lose 0.01% deductiblility because 7 years ago they drew on the loan for some blinds and cant find paperwork. ATO except the calculation be considered. Even of it rounds out to under a dollar and doesnt affect deductions. They except to see you considered it.