Terryw’s Ideal Loan Structure

The trustee would be either making a distribution to you as a beneficiary or lending you money or paying you a wage.

This won't really change things that much. If you are buying properties in your own name then the strategy outlined above will apply.

If there is another trust purchasing property then there will be a slight variation as you will have to lend money or gift money to the trustee to use as the deposits. I might write another one in future specifically for this sort of situation.

 

Terry, sorry to be pedantic about this....i think above should be 20%....

 

thanks for the share. I think only part I've not utilized is the paying the investment costs out of CC. I also find that some of the costs in my instance at least are not payable by CC without incurring costs (e.g. body crop fees). If I'll ever do this, I guess I'll prefer having two separate CC for both personal & investment costs and pay it off from saving/offset account.

 

Actually 10% is correct as this is the usual deposit paid on an investment property. The remaining 10% or so is paid at settlement.

 

Terry, you're a champ mate. Very clear and informative post, what would we do without you?!

I have a question.. a slight variation from your scenario.

What are other/further steps should I take IF I buy a second property and use it as an IP first (with the intent to convert it to PPOR later and convert my current PPOR to IP )?

1. Obviously, since I'm not moving in first, I will be subject to CGT if were to ever sell the 2nd property. True?

2. Arrange for IO in all my properties. But my confusion is, does it mean that the loan for the 1st property (PPOR then became IP) would become deductible later on?

3. In the same token, does it mean that the loan for the 2nd property (IP then PPOR) would become non-deductible after I've moved into the 2nd property?

4. If I keep the loans separate, I wouldn't be mixing them yea? Just start treating 2nd loan as non-deductible and 1st loan as deductible after I've moved?

Your insight would be much appreciated Terry!

 

You have a PPOR and are planning to buy an investment property and then later move into the investment property.

In this case it is essential that you maximise borrowings on the current PPOR. This can only be done at purchase - you can't just increase the loan as the use of the borrowed funds determines deductibility.

So immediately convert your current loan to Interest Only. Keep all cash in the offset.

When buying the IP all the usual stuff applies as in the first post, but try to avoid LMI. Once you decide to make the move just take the cash in the offset with you to an offset account on the new PPOR.

Yes when you sell the new PPOR it will be a CGT event but there will probably be no tax payable because it will only be a small percentage and you can use interest and other costs incurred while living in it to reduce any CGT payable.

 

@Terry_w Great post, thank you.

However you got me thinking...Say if I have borrowed 90% on all my IP's (therefore no equities for LOC's). For my next purchase can I borrow 90% from Bank (Investment Loan) and other 10% + SD from say a Trust/a friend/ or a personal loan. Once there is enough equities within the newsly purchased IP in say 2 years time, I will request the bank to borrow additional 10% + SD amount and repay the Trust/Friend/Personal loan etc?

 

You and your trust, or you and your friend, can have a loan agreement that says what interest rate is payable and what terms are involved.

Your trust can lend you money and so could your friend using the above. Then you repay them as per the terms of the agreement.

 

Thanks @D.T.!

 

See https://propertychat.com.au/community/threads/legal-tip-38-spousal-and-related-party-loans.1872/

The normal tax deductibility principles will apply. But where the source of the funds originated with the borrower the ATO may deny the deduction. e.g. you gift money to a trust and then borrow it back. It may or may not be acceptable. Where it is capital of the trust and you borrow it on arms length terms then the loan will be able to be refinanced down the track with a bank.

 

You said you were going to rent the current PPOR out. If you are able to maximise the loan on this then you will be able to claim more once it becomes an investment. this may involve a bit of juggling if serviceability is an issue. If that is the case you have to ask yourself would it be better to get more deductions now or more in the future.

 

Thanks Terry. Your posts are always so informative. Thanks for taking the time.

 

Thanks Terry - yea, i think I was mindful of serviceability (for my 2nd property - eventual PPOR) and hence didn't maximise my loan for the 1st property.

 

Thank you for the much anticipated post - any advice on how to structure loans if the bank is willing to lend you more against your IP (or IPs) than you can legitimately claim that you borrowed in securing and/or servicing the IPs (from other borrowed funds, of course)?

Would you split each IP loan to reflect the actual amount that you can tax deduct the interest on, with the rest...?sitting there in a separate unused LOC?, but not as an offset, as it would reduce the deductibility of the IP loan?
If so, then would you pay all expenses associated with that IP from its' LOC?

I'm not sure how common the practice is, but I've been told that the extra funds that the bank is willing to loan me could be offset against my PPOR, thus reducing non-TD interest, but I can't see how this is possible, without the IPs being fully drawn,... and it is the purpose for which a loan is used that determines it's tax deductibility, right?
Has anyone come across this strategy before?
Does it only work if the first home was your PPOR, with all subsequent borrowings being IPs?

 

Great post Terry. I understand all except the credit card. If all expenses for investment property are coming from the credit card and all rental income etc is going into the offset account, when does the credit card get cleared or paid down? It seems like the balance would continually rise and there was no mention of how credit card gets reduced once expenses come out. Do you transfer money from the offset account to clear the credit card after expenses have been paid? Cheers

 

I think Terry suggest us to use credit card's interest free period to its full length and pay it off before the period ends. This way you can reduce interest in your loan by keeping it in your offset account and you dont have to pay interest on credit card during this period.
In essence, you will use borrowed money(interest free) to reduce your interest on loan.

 

Deductibility depends on use. So it depends what you do with the additional borrowed funds

I wouldn't use an offset because the interest may not be deductible. Tax Tip 1: Parking borrowed money in an offset account

Initially you would not know how much money you would be using for each future investment property so it is difficult to split the LOC now. But you may anticipate this by splitting it into multiple portions now as in Tax Tip 13: Simple Loan Structuring Strategy

No this is not possible. The interest on those funds would not be deductible.

 

Yes. You just pay the credit card off in full before the due date - using money from the offset.

 

No this is not possible. The interest on those funds would not be deductible.[/QUOTE]

Thanks Terry, for confirming my suspicions.