Using Offset to put down deposit on IP

Discussion in 'Accounting & Tax' started by Hitesh Varsani, 10th Mar, 2018.

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  1. Hitesh Varsani

    Hitesh Varsani Member

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    Hi All,

    Hoping to get some clear advice. I bought an investment property in October 2016. I put down a deposit using money from my offset account linked to my current home loan.

    Am I able to claim all rental related expenses on on the investment property?

    My accountant seems to think I cannot as I used my offset account to put down the deposit where I should have used the redraw facility?

    Any help would be much appreciated

    Thanks

    Hitesh
     
  2. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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  3. Hitesh Varsani

    Hitesh Varsani Member

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    Hi Alex,

    Thanks for your prompt reply. I read your link but am still a little confused as I am looking to claim interest on my investment property loan and not the one for my main residence?

    If this still not possible am I allowed to claim other rental expenses like rates etc?

    Please advise

    Thanks

    Hitesh
     
  4. Greyghost

    Greyghost Well-Known Member

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    If funds sat in offset your should have
    1. Transfer deposit amount from offset into loan (redraw)
    2. Then drawn the funds again from redraw direct to the trust account of agent to pay deposit.
     
  5. Hitesh Varsani

    Hitesh Varsani Member

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    Hi Grayghost,

    Thanks for your reply, so my accountant was correct as he said the same thing.

    It seems a little silly a short my offset is derectly linked to my primary loan and all I did was transfer money out directly into the trust fund of the settlement agent.

    I take it I cannot claim anything then even though its a investment property?

    Thanks

    Hitesh
     
  6. kierank

    kierank Well-Known Member

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    Do you mean as a separate loan?
     
  7. JasonC

    JasonC Well-Known Member

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    Hitesh,

    I'm assuming from that you have said that when you bought the investment property you did something like:
    • Paid purchase costs + deposit (say 20% deposit + 5% purchase costs) out of the offset account attached to a PPOR.
    • Obtained a new loan for 80% secured against the new investment property where the proceeds where used to settle on the IP
    • Have not done any further drawdowns on the new loan.
    • The IP has been fully available for rent since you settled on it
    In this case:
    • The interest on the 80% loan is a tax deductible expense
    • Normal investment property expenses will be deductible expenses (ie. rates, basic maintenance, PM fees etc)
    • Any other expenses for the investment property may be deductible expenses as well (with some exclusions or complications ie. repairs - but your accountant should guide you on these).
    If you had paid the purchase costs + deposit from a redraw rather than an offset (ideally redrawn on a newly setup loan split so the balance was $0 beforehand) then the interest on this loan split would also be tax deductible.

    If your accountant says none of it is deductible because you paid your deposit using an offset account it is time to get a new accountant.

    Regards,

    Jason
     
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Example

    Main residence with $500,000 home loan with $100,000 in offset.
    You only pay interest on $400,000

    You now go and buy an investment property worth $500,000 and borrow $400,000 against this and use $100,000 from the offset.
    You pay interest on the $400,000 loan and can fully claim this.
    BUT the interest on the home loan now jumps because you are paying it on $500,000 and this extra interest is not deductible.

    If you have done the above you have robbed yourself of an extra $4,000 deduction for the next 30 years or so.
     
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  9. Mike A

    Mike A Contact 0448 998 132 Business Member

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    As @Terry_w says the interest on the investment loan will be deductible.

    However a small caveat there if you use part of that new investment loan to reimburse yourself for the deposit paid out of your offset or put funds back into the offset then that portion wont be deductible. Dont complicate it further by making it even messier.
     
    Hitesh Varsani likes this.
  10. kierank

    kierank Well-Known Member

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    I would think about changing accountants as I believe they are wrong.

    Let’s break it down into three components:

    1. Income/rent from the IP must be declared and property expenses such as rates, maintenance, etc are tax deductible.

    2. The interest on the loan where the IP is used a security is tax deductible, on the understanding these funds were used by the IP.

    3. If you withdrew the funds straight from the Offset and place them in the trust account, then there is no expense as you use cash for your deposit (the interest charged on your PPOR loan will increase but that is NOT tax deductible)

    BUT

    If you transferred the Offset funds into your PPOR loan and then took out a seperate equity loan using your PPOR as security, then the interest on this new loan is tax deductible.
     
  11. Hitesh Varsani

    Hitesh Varsani Member

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    Hi Jason,

    You have explained this perfectly.. this is exactly how I paid for the IP.

    Time to get a new accountant

    Thanks

    Hitesh
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    It would be very strange if the accountant did say no interest is deductible. Perhaps you misinterpreted what was reported or didn't explain what you did properly?
     
  13. Hitesh Varsani

    Hitesh Varsani Member

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    Hi Terry,

    I think I am partly to blame as seeing Kierank's reply and Jason's reply I do now recall something about claiming for 80% of the loan.. I am an IT guy and he was talking Tax jargon which was a new language to me

    Thanks for you help guys.

    Hitesh
     
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  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Most posts here are speculation. Not a great deal of facts. I believe that a review of the offset is required. Where did those $$ come from ? Assuming you say savings then there is one strategy and if you say - a equity release on your home...there is another.

    When that is done then tax advice will confirm if any is deductible and may recommend a loan split too. Some tax advisers arent great at explanations in plain english and others dont know property tax really well - Just fundamental stuff. To avoid any cost - ask the accountant why they said no deduction. There may be a sound reason based on facts they said that. I suspect they may say - Because using an offset merely increases the loan due on the home. However if the offset contains $$$ borrowed against the home it could be a blended loan and a % may be deductible. It can also be fixed to avoid it becoming worse later
     
  15. Hitesh Varsani

    Hitesh Varsani Member

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    Hi Paul,

    Thanks for your reply. Ok here is an example breakdown of the situation.

    300k loan on primary property. 300k in offset for primary loan (Suncorp).

    Used 200k to put down deposit for investment property which creates my second loan (commbank)

    I am looking to reclaim interest on my second loan as I put the house in rent and an unable to find anyone to rent. House sitting vacant for a year.

    Now looking to demolish and build a house for myself.

    Thanks

    Hitesh
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    vague

    'used $200k' - how, from where? why does using create a loan?
     
  17. Hitesh Varsani

    Hitesh Varsani Member

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    I withdrew 200k from my offset account on the Primary loan to put down a deposit for the investment property. This 200k was transferred to the settlement agent. This created my second home loan for my investment property. Loan is with commbank

    Thanks

    Hitesh
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    How does that create a second loan? You used cash
     
  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I think the OP means the 20 % deposit , ie he used the 200 from his offset and borrowed the other 800 from the "second" loan

    ta

    rolf
     
  20. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I think what Paul wants to know is

    • 1. Where did the 300 k in the offset come from ( borrowings or savings)
    • 2. If borrowins, was there any other cash in the offset - ie salary etc
    ta

    rolf