Tax Tip 6: Using Redraw to invest

True @Terry_w. However, if I can't claim interest on those would it make sense to have separate LOC/equity account to pay those to avoid mixing deductible and non deductible interest?

 

The interest on loans for capital expenses can be deductible too. I see no benefit in a separate loan.

 

So say if I paid $500 for B&P, $50000 deposit, $2000 solicitor fees and $15000 stamp duty from one LOC account would I be able to claim interest on $67500 every year I own that IP?

I'm a bit confused as I thought that of the above expenses I can only claim interest on $50000 deposit.

 

Yes, if those expenses relate to an investment property they are deductible. If you borrow to pay them the interest is deductible.

 

Thanks @Terry_w!

So is it correct to say that if I borrow to pay any expenses related to IP (e.g. reno, PM fees, etc.) the interest on those is tax deductible?

 

see
Tax Tip 4: Borrowing to Pay investment expenses https://propertychat.com.au/community/threads/tax-tip-4-borrowing-to-pay-investment-expenses.1554/

 

This is my current favourite channel on Youtube


There are about 54 summaries of books such as 4 hour work week, Hooked: How to build habit forming products etc.

Each is animated with diagrams which can help explain the idea. They are short too - about 10min - so you can listen while cooking dinner etc. My aim is to listen to 2 per day.

 

Sorry, i posted the above in the wrong thread - but might as well leave it here as it is such a good channel.

 

so i get this right....if my PPOR loan is IO until 2020 and I am not going to pay anything extra than required interest until 2020 on this loan then i can draw the money from redraw (e.g. 10K in 2017, 15K in 2018, 10K in 2019) rather than separate split and use them for investment purposes without affecting deductibility.....I calculate interest for all these 35K separately and claim deduction on them in case ATO comes asking for explanation....

however just before my IO is expiring I refinance my PPOR and setup additional split of all redrawn money until 2020 (i.e. 10+15+10 = 35K) which were used for investment purposes. Argument here will be that individual has not paid any principal back hence it is not mixed loan.....is that right??

 

I don't follow.

If your loan is IO and you are not paying any extra money in, where is the available funds for the redraw coming from? Perhaps from previous extra repayments?

If you are redrawing or borrowing money for any purpose different from the original borrowings there you will be mixing the loan.

But if the loan is IO then it should be easy to apportion and to unmix the loan down the track by splitting.

 

Yes, I mean to say pay off the loan so money is sitting in redraw cause it is IO loan. So use personal savings to pay off the 10K on loan given its IO this 10K will be sitting in redraw. draw this 10K without separate split and buy 10K worth of shares so interest on 10K is deductible basically....and repeat the process

With above approach you are absolutely creating mixed purpose loan however cause you are not paying off the principal (as its IO only) one can get away without split option. The way i understand the key is when one refinance the loan before IO expires then separate split need to be setup

 

Repeating will be fine as long as you do not pay any more money into the loan. i.e. don't pay in another $10k thinking you can then reborrow that $10k as it will cause mixing.

 

That' interesting. Even though you are repeating the process aren't you following the same logic. I mean eg. in 2017 I use 10K via this method to invest in shares. In 2018 I can repeat the same process park 20K in redraw from savings and draw it without separate split and buy 20K worth of shares.....isn't the logic same.....I mean key is as long as loan is IO and one is not paying off the principal this process can be repeated....
I understand the loan in Mixed but when you refinance you setup separate split of 30K (10+20K) assuming you'll start paying principal off on the refinance...

 

Repaying into mixed loan will result in the money coming off all portions.

 

https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/

 

got it. so when you repeating the process there is no way of knowing you are paying off the 10K u drawn few days earlier or the original loan. so this process can be done once only. Too much trouble for little loan.

Personally in my case most i can do is 20K @ 5% that is 1K claimed in tax and not much return in my tax bracket. I guess this makes sense if you are borrowing more. currently these 20K is offsetting my IP loan. I know its offsetting deductible but still better than doing nothing....

 

That is why it can be a good idea to split your loan into multiple loans from the beginning such as in
Tax Tip 13: Simple Loan Structuring Strategy https://propertychat.com.au/community/threads/tax-tip-13-simple-loan-structuring-strategy.2601/

 

I agree Terry. One has to wonder though with all these possibilities of different loan structuring to increase the deductible loan and reducing the non deductible ....ATO can always apply Part IV dominant purpose of obtaining a tax benefit . In your experience have you seen any of the similar arrangements being tested with Part IV by any chance....

 

You are not artificially increasing deductions but just arranging you affairs for easy segregation of loans for tax reasons. Most of these are covered in ATO publications and rulings such as TR 2000/2.

Some of my more hairy strategies may be at risk of PartIVA so these should be done with a PBR or tax advice - spousal loans, borrowing to pay principal part of a PI loan etc.

 

Hi @Terry_w ,

If I have a fully paid off PPOR (into offset) and want to buy a portfolio of shares, should I transfer all offset money into the loan, then redraw to make the interest deductible? Assuming shares are income producing.

If I sell the shares in the future and pay down the loan, then also rent out the PPOR, I can no longer access my offset funds (because they were paid into the loan), so there is no interest to deduct even though it has turned into an investment property. Is there a way around this?

Thanks