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Tax Tip 77: Redrawing Extra Repayments to Increase Deductions?

Discussion in 'Accounting & Tax' started by Terry_w, 5th Nov, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This sort of question is pretty common:

    Q: I am about to move out of my home and rent it out. To increase tax deductions can I just borrow up to 80% of the property? If not, can I just take out all the extra repayments I had made over the years? If not, then ‘that is stupid!’

    The increasing of a loan means you are borrowing more money. Taking money out of redraw means you are borrowing more money. The interest on borrowed money is only deductible if the borrowed money is used for an investment or business purpose.

    So if you increase the loan the use of the extra money will determine it is deductible. Most people want to do this so they have transfer money to their new main residence and thereby pay less non-deductible interest. But the interest on this extra money borrowed will not be deductible and it will also create a mixed purpose loan.

    This is very logical.

    Plan ahead. If you could move out then ideally an IO with an offset account may be the way to go from the beginning - not easy these days on a main residence though.
     
    sydneysiderrr and MTR like this.
  2. sydneysiderrr

    sydneysiderrr Member

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    Hi Terry,

    I've been reading your tax tips for a while now and it takes time for my brain to digest. Hence I might as well ask for your wise opinion on my current scenario ;

    I have PPOR unit say current value $420000 to be conservative. It's a P&I loan with loan balance $285000. I am planning to make it an IP and then buy another IP2 with that equity.
    What's the best way of doing this? In terms of loan structure( should I refinance/split loan or just redraw from existing loan to pay for next IP)
    If the equity in my existing property is only $51k based on LVR 80%, what would you do with it if you were in this position?
    p/s i would like to lower down my tax bracket by maximising tax deduction (makes a lot of difference in this instance )
    Thanks in advance for your advice
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Quickly change it to IO.
    Don't redraw
    Set up a new split against it and use this as deposit
    avoid borrowing and parking in an offset
     
  4. JesseT

    JesseT Well-Known Member

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    What options are there to make it tax deductible?

    Example - PPOR1 (now IP1) has 100k line of credit to go toward purchase of PPOR2.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    To make what deductible?

    If you are borrowing to pay for private expenses the interest cannot be deductible.
     
  6. JesseT

    JesseT Well-Known Member

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    Sorry i was not clear enough, I understand that it is non deductible.

    Is there any debt recycling methods used to eventually make the 100k line of credit tax deductible again at some point down the track?

    Or your only options are to rent out PPOR2 or pay off the 100k LOC against IP1 and redraw for investment purposes?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You could start a debt recycling strategy
     
  8. sydprop

    sydprop Active Member

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    Much harder these days. I have done this (optimised minimal deposit on new PPOR, cash in offset) but absolutely kills serviceability. To the extent that I will probably have to unwind it a little.

    Also note the perhaps small risk of having more than 250k in one account:

    More than $250k in the offset?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, I agree it can kill serviceability. Sometimes it is just better to pay down loans.
     
  10. sydneysiderrr

    sydneysiderrr Member

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    Thanks Terry. Just to clarify, so now i will need to refinance 90% LVR and split the loan into 2;
    1. $285000
    2. $93000

    If i use this $93k for IP2 downpayment it is tax deductible, correct?
    How about tax deductibility on IP1 now? I can only claim for $285k?or i can claim for the whole $420k as I've borrowed the equity in IP1(used to be PPOR)?
    Do i need any offset account for these?
    Thanks
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Basic on my interpretation of what you have writtenl
    1. relates to the purchase of the main residence
    2. relates to the purchase of the IP

    So the interest on 1 will be deductible (providing no redrawn amounts) when the main residence becomes an investment.

    The interest on 2 becomes deductible once drawn to pay for an IP.

    Each is deductible against the property it relates to.

    note that you cannot claim the $93,000 but just the interest on this loan.

    You should have an offset on the loan attached to your new main residence. If there won't be one then it would be a good idea to set up one on one of the investment loans - better with the higher interest rate loan so you save more tax.