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Tax Tip 62: Paying Cash for a property and then getting a loan

Discussion in 'Accounting & Tax' started by Terry_w, 20th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Paying Cash for a property and then getting a loan


    I have recently heard of a few people paying cash for investment properties and then mortgaging them and borrowing money after the settlement. SImilar with construction of investment properties as in this thread https://propertychat.com.au/community/threads/subdivision-loans-does-this-make-financial-sense.4899/


    Usually this is much easier if you can do it. There are no time pressures with getting an approval before settlement.


    but there is one huge problem. Interest is only deductible if the loan relates to the acquisition or costs of purchasing a rental property. If you pay cash and then borrow it won’t work, tax wise, because you have acquired the asset already. i.e. you won’t be borrowing to acquire the property but to reimburse yourself. See

    Tax Tip 5: Reimbursing yourself - Impossible

    https://propertychat.com.au/community/threads/tax-tip-5-reimbursing-yourself-impossible.1737/


    One argument is that this is the same thing, but just in reverse order. It is not the same thing, but in different order. It is totally different.


    If you want to use cash then it could be deductible if A borrowed from B and then later refinanced A’s loan from B to a Bank. This may be possible where spouses are involved, or different entities are involved - but seek legal and tax advice first.


    If you buy and then borrow the interest on the borrowings could be later deductible against a new purchase, but not if you park that funds in an offset account and mix them with cash.


    Tax Tip 1: Parking borrowed money in an offset account

    https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/



    But the situation is totally different if you are using cash from a loan or LOC. Because this involves borrowing the interest will generally be deductible in full (unless you mix it or take the borrowed funds on a detour first).


    Summary

    Taking cash from a savings account or offset to pay for investment expenses = not borrowing = bad

    Taking cash from a loan or LOC = borrowing = good
     
  2. pinewood

    pinewood Well-Known Member

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    Thank you for this Terry. I seem to be doing everything that's not right. First my cross collateralised loan, now this! Any more bad news for me? and what advise can you offer so I don't keep having to learn from my mistakes.....you're going to tell me to read all your tax tips!!!:(

    What if A borrows money from B to pay the 10% deposit. Then A gets loan for property..... if A pays B back from the loan account after settlement, the10% that was borrowed would it then be deductible?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Loans can be refinanced without effecting deductibility as long as they are properly set up.

    So A can lend to B and then B can refinance this loan with say ANZ.