Tax Tip 55: An Exception to the rule about splitting before Repaying a Mixed Loan

I can't see the tax treatment being any different.

 

Is the interest only deductible to the incomes, eg dividents and rental incomes, or also deductible to the capital gains if sold?

 

you cannot claim both, but it could be deductible against the capital gains if you didn't claim it against the income.

 

Bob invests $100k redrawn from his home loan into shares which is $1 per share.
Suppose the interest this year is $5k while the dividents this year is $4k.
Bob sells all shares by the end of the fiscal year and get $104k.
Do you mean, whatever he choose to claim the $5k against his income or capital gains, only $4k interests is deductible?

 

If he gets dividends that is income and the interest could be claimed against that. If he doesn't claim it he can claim it off the capital gains.

There would possibly be different outcomes if he has a capital loss or held the shares longer than 12 months.

 

Bob invests $100k redrawn from his home loan together with another $100k from his savings into shares
The interests this year is $5k.
The dividents this year now is $4k+$4k=$8k
Can he claim all the $5k against the $8k of the total dividents?

 

Bob can claim the interest against the income it relates to which would be the $4. But this loss would reduce bObs overall income so in effect he is claiming the interest off the $8k

 

If Bob only invests $100 from his home loan and doesn't sell shares this year, he will have $5k interest and $4k income this year.
Then he will have $1k loss this year.
Does this $1k loss deductible for his next year's incomes or capital gains?

 

see above

 

Hi Terry, thanks for the great tips and your generous knowledge sharing !!!!

Say in this example if John borrows the 100K equity loan/redraw in a new split account, lets call this LoanA. It exists completely separate from his other 400K PPOR loan.

Firstly John draws down from LoanA 30K to fund the purchase cost of rental IP1 (to cover 20% deposit, legals, stamp duty, building/pest inspection, deppreciation reports etc.) Then later on John draws down another 30K to fund the purchase cost of rental IP2, then lastly 40K to acquire rental IP3 .... bringing the total available redraw down to $0.

Question1:
Would the *deductable* respective interest portions on LoanA look something like this ?
IP1 = 100% of the interest bill until IP2 is acquired, then it becomes 50% of the total bill.
IP2 = 50% of interest bill until IP3 is acquired, then it becomes as follows:
-IP1 = gets 30% of interest bill on LoanA
-IP2 = gets 30% of interest bill on LoanA
-IP3 = gets 40% of interest bill on LoanA

Question2:
Since each IP has got their own individual loan covering 80% of the initial purchase cost, their loan structures are as below:
IP1: 80% of purchase cost in Loan1 and 30K from LoanA.
IP2: 80% of purchase cost in Loan2 and 30K from LoanA.
IP3: 80% of purchase cost in Loan3 and 40K from LoanA.

Over time as the values of IP1 and IP2 grow John decides to consolidate by refinancing as below:
IP1: increase total Loan1 by 30K (same loan account and not split) and pay LoanA down by 30K.
IP2: increase total Loan2 by 30K (same loan account and not split) and pay LoanA down by 30K.

The total interest of Loan1 and Loan2 remain 100% deductable against each IP.
The interest bill on LoanA then becomes 100% deductable against IP3.
Does this sound right ?

 

1. sounds right
2. doesn't because the exception to splitting only applies to a sale.

 

oh ok, so in this case if IP1 and IP2 are not sold then John won't be able to consolidate his Loan1 and Loan2 in this way then ?

But if John sells IP1 and IP2 then he can pay down:
LoanA by 30K from proceed of sale on IP1
LoanA by 30K from proceed of sale on IP2

and the interest on LoanA then remains 100% deductable against IP3 ?

 

Yes

John should split the loans before consolidating them. The ATO might turn a blind eye, but there is nothing to say they would do this so could be risky.

 

So in order for John to use draw down equity to fund the purchase of the IPs and to later cleanly consolidate without causing issue to deduction should look like below ?

Draw down 30K in LoanA to fund purchase cost of IP1
Draw down 30K in a separate LoanB to fund purchase cost of IP2
Draw down 40K in a separate LoanC to fund purchase cost of IP3

Then as their values grow, consolidate by:
-Increasing the total of Loan1 by 30K (with no other split account) to pay down LoanA.
-Increasing the total of Loan2 by 30K (with no other split account) to pay down LoanB.
-Increasing the total of Loan3 by 40K (with no other split account) to pay down LoanC.

The total interest of Loan1, Loan2 and Loan3 shall remain 100% deductable against their corresponding IP?

 

That's one way to do it. He could also split later

 

sorry I don't understand...If he splits LoanA later then wouldn't it look like the first scenario which I described above and which you think could be risky ? Can you elaborate more on what you meant by split later ? ... this is for when the IPs are not being sold.

 

Actually on second thought did you mean the below ? In the event all IPs are being kept and not sold off.

To consolidate loans as the IP values grow, John does the below refinance:
Break LoanA into 3 separate accounts:
-30K to cover purchase cost of IP1, lets call it LoanX
-30K to cover purchase cost of IP2, lets call it LoanY
-40K remains to cover purchase cost of IP3, in LoanA

Then:
-Increase the total of Loan1 by 30K (with no other split account) to pay down LoanX.
-Increase the total of Loan2 by 30K (with no other split account) to pay down LoanY.
-Increase the total of Loan3 by 40K (with no other split account) to pay down LoanA.

Claim 100% deduction interest of Loan1, Loan2 and Loan3 against their corresponding IP?

 

sounds like you haven't read my other tax tips on mixed loans (and are not getting specific tax advice).

 

Check these out:

Tax Tip 3: Mixing Loans - Don’t do it https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/

Tax Tip: An issue with mixed purpose loans where both portions are investment. Tax Tip: An issue with mixed purpose loans where both portions are investment.

Tax Tip 44: How to Un-Mix a Mixed Loan Tax Tip 44: How to Un-Mix a Mixed Loan

Tax Tip 45: How to work out the Portions of a Mixed Loan Tax Tip 45: How to work out the Portions of a Mixed Loan

Tax Tip 54: Why Not to Mix Loan Purposes Tax Tip 54: Why Not to Mix Loan Purposes

 

thank you