Using equity out of unencumbered IP to fund OO block

Hi everyone

I am considering withdrawing $200,000 from an investment property worth $430,000 which will soon be unencumbered. (Certificate of title is currently being used as collateral for another IP)

If I was to do this, purchase a block of land in cash with the intention to build sometime in the future will the interest on the $200,000 be tax deductible as it would be held against the IP?

Alternatively, I could use the unencumbered certificate of title as 20-30% of the block of land's deposit leaving me with a $200,000 non-tax-deductible loan, though this is not ideal.

Thanking you in advance

 

Deductibility is based on usage not security.

not sure why people think otherwise.

what you should have done was have an offset account against the ip loan. Probably too late now.

 

Hi Trainee

Is this because the funds are being used to finance and owner-occupied property?

 

Deductibility is based on purpose and usage. If loan proceeds used for ppor, not deductible.

 

Land is vacant & not income producing.

 

Not too late luckily, the IP was inherited and was used as 20% deposit to fund an IP in QLD. Both are now tied up in one mortgage with a %100 offset account attached.

Thanks for the info!

 

how will it be unencumbered if it’s cross colled? How will ypu uncross them?

 

Soon to be paid off from the sale of shares

 

You cannot use a property as deposit either. All you can do is borrow against it.

 

Ah yep, that's what I meant, thank you

 

1. If I was to do this, purchase a block of land in cash with the intention to build sometime in the future will the interest on the $200,000 be tax deductible as it would be held against the IP?
No. The potential deductiblity of the interest relates to how the funds are USED. ie the new land, not the IP. Note also that deductions for holding vacant land are not available until the property is constructed, completed and available for rent after an occ cert is issued. So, no deduction either way.

2. Given that the IP is already "crossed" this may indicate a lender concern. The reassessment of servicing would consider that no deduction is available and may not be well regarded by a lender. Lenders may also want to consider the estimated tax on the CGT event. I am commonly asked for an accountants letter to confirm the tax estimate and the taxpayer may need to demonstrate this liability is set aside.

 

Hi Paul

Thanks for the info, with this is mind I think I will sell shares to pay for the deposit on the block as to not cross the IP and OO land instead.

 

Why not just borrow against existing property and use that as a deposit?