Terryw’s Ideal Loan Structure

No you will be creating a mixed purpose loan and only part could be deductible.
Tax Tip 3: Mixing Loans - Don’t do it https://propertychat.com.au/community/threads/tax-tip-3-mixing-loans-dont-do-it.1517/

 

Thank you Terry_w!

 

But loan B is to pay a non investment? ie: using the remaining of loan B for Personal use?
You'll need to split Loan B (Let's call it B1 and B2) - B1 will be for investment and this is tax deductible.
B2 is personal use and not deductible at all.

Edit: had the page sitting there but didn't refresh - terry explained it

 

Hi @Terry_w, good post, especially for new starters. If loan B coming from an IP is used to buy a PPOR but the PPOR is turned to an IP after 2/3 years, can the interests be deductible during the IP period? If so considering the interests on OO are usually lower than the ones on Loan B, I guess it is generally speaking better to pay cash the deposit for PPOR instead of living them parked in the offset account (if using Loan B as deposit). Loan B can be used for another IP hence fully deductible.

 

Look at what the funds are used for. The loan relating to a property being live in is not deductible

 

Look at what the funds are used for. The loan relating to a property being live in is not deductible

 

Hi I have a very similar situation as the example on the original post. Initially the bank created equity release loan B 300k debited and an offset account that has $300k credited. Im about to pay for deposit and other presettlement cost from the offset account, would that cause an issue in tax deductibility?

 

Placing borrowed money in an offset account means it is no longer borrowed money. There is an arugment that it can be traced to the loan but only if the money in the offset is solely borrowed money and not other money.

All explained in my tax tips 1

 

Hi Terry, so should I put the offset money back to the loan it self and just redraw to pay for presettlement cost and deposit?

Thanks,

 

That might be a good move, but how would you get it out.

Seek personalised tax advice

 

Hi Terry,

Thank-you for redirecting me to your tax structuring tips.

I have a question that wasn't covered by your previous answers.

I currently have a PPOR and IP which are each secured by 10% Term deposits.
If I want to restructure my loans to the structure you are describing here.

Dissolve both of my term deposits to pay down my PPOR to create equity and then split the loan and use that as the security for my IP. Would doing this now rather than the initial purchase period allow me to use your strategy still for tax minimisation. I understand stamp duty etc can no longer be used.
10% deposit and conveyancing fees ~ 5% of purchase price from Loan B

Kind regards

 

The loan would just have 2 securities. All you have to do is to substitute security. Easy if the value has increased

Eg. $100,000 purchase price House A
Loan with ANZ $100,000 secured by House A and a term deposit of $20,000

Now house is worth $130,000. 80% of $130,000 is $104,000 so the loan of $100,000 can be supported by the property alone. $100,000 secured by property A. Just apply to release the term deposit as security.

If values haven't grown but you have other property with equity then also pretty easy


Eg. $100,000 purchase price House A
Loan with ANZ $100,000 secured by House A and a term deposit of $20,000

Property B has equity so you set up a separate loan of $20,000.
You then pay down the $100,000 loan to $80,000. This is a refinance of $20,000 portion of the loan so no change in deductibility. Since ANZ's loan is now less than 80% LVR just apply to remove the term deposit as security.

Once the term deposit is released you can then use the cash - as you please.

 

Hi @Terry_w you say to pay all expenses on credit card for IP etc council rates, water rates. what are the beifits rather then out of equity offset or savings offset?
thanks

 

Frank, 2 potential benefits
a) points such as flybuys
b) potential to refinance the credit card with another loan - see separate tax tip that I wrote on this.

 

thanks terry i will check it out,
if i do not have a credit card, best to pay with equity offset or savings offset or is there no difference as they are both offsetting loans

 

what is an equity offset?
If you have borrowed money and parked it into an offset account see my tax tip 1

And, I just thought of a 3rd benefit
c) keeps cash in your offset longer saving you more interest

 

sorry yes i ment borrowed money parked in an offset
thanks ill check that out also

 

Hi Terry, can you please advise in your example,

1, Does Loan B/C each have an offset account?
2, If q1 is no, how monthly interest on loan B/C is repaid? Through Loan A offset?
3, If q1 is no, how loan C IP's ongoing cost (rates, repair) is paid? Through Loan A offset?
4, How PPOR ongoing cost is paid? Through Loan A offset?

5, if in 5 years, there is enough equity in loan C IP and loan A PPOR to be used as deposit for another IP, is it best to use loan C IP to start a loan D against IP? instead of PPOR?

 

1. no
2. yes from the offset account on the non-deductible debt
3. depends on your tax advice. either from the offset account or borrowed.
4. yes
5. I would refinance the deposit loan used for the IP into the main IP loan and then borrow separate for the main residence - security doesn't matter too much.

 

Thanks,

1, Regarding 5, are you saying refinancing Loan C to be Loan C+extra loan, and borrow Loan D against main residence, then use 'extra loan' + 'loan D" as the deposit for the new IP?

2, Regarding your original example, if the first IP will be held in a trust (the main residence owner will be a corporate trustee), and the IP has potential to be subdivided and developed, does it make the loan structure different? For example, buy the IP with a family member and develop and hold/rent