Using Offset to put down deposit on IP

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

 

Tax Tip 9: Don’t use Cash in Offset account to Invest

 

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

 

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.

 

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

 

Do you mean as a separate loan?

 

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

 

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.

 

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.

 

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.

 

Hi Jason,

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

Time to get a new accountant

Thanks

Hitesh

 

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?

 

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

 

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

 

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

 

vague

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

 

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

 

How does that create a second loan? You used cash