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What Do You Use Your LOC for?

Discussion in 'Accounting & Tax' started by Hedgy, 1st Aug, 2016.

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  1. Hedgy

    Hedgy Well-Known Member

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    Hi All,
    I have recently established an LOC for use in relation to one of my IPs. I'm just curious what type of IP expenses people are--or are not--putting on their LOC? I intend to put pretty much all of my IP expenses through the LOC including: rates, water (service fees only), payment for repairs and maintenance, and my agent's management fees. I'm curious whether there are any no go IP expenses that shouldn't be put through the LOC. I intend to claim the LOC interest as a tax deduction so hence my curiosity about what IP expenses people are and are not running through their LOC. Yes, I have spoken to my accountant about this but always interested to hear the thoughts of others.
    Cheers,
    Hedgy
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Everything except other loan repayments.
     
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  3. wowo

    wowo New Member

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    I'm curious.

    In your opinion, in regards to having an account to pay all your IP expenses, what would be the better option?

    1. LOC, whereby as Terry advised above, you pay all expenses with the exception of loan repayments
    or
    2. Offset account (set against your PPOR). If you have a lender that offers multiple offsets, which allows you to have dedicated offset purely for your IP - whereby expenses and loan repayments are deducted; and rent is credited - no contamination.

    Or does it not matter?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See why I don't like the offset option here:
    Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

    The LOC also has 2 major downsides
    - higher rate
    - at call

    A solution may be to get an IO loan with free redraw and one that has the ability to pay from - such as Westpac roket.
     
  5. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    Be very careful with using borrowed funds to pay for loan repayments. Also, I wouldn't have rent credited to this account - it's not necessary and is likely to cause issues.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Great Point Daniel.
    I missed the bit about the rent being deposited.

    Same princples would apply as to depositing rent into a LOC, see:
    Tax Tip 84: Don’t Pay your Rent into a LOC Tax Tip 84: Don’t Pay your Rent into a LOC
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    A LOC can be used to prepay a year (? or any period under a year) of interest in advance if its large enough and the bank with the loan debits it.

    Otherwise don't pay the loan or interest without advice.

    I'm not convinced a agent management fee is incurred until the tenant pays. I havent seen too many agents who charge a fixed agreed monthly charge or even a PM agreement that deal with it in advance. Their agreements tend to have a nexus to client income receipt.
     
  8. wowo

    wowo New Member

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    Sorry I am a little confused.
    In my post above I referred to an offset account - In my case, all monies related to the investment property are credited and deposited from this account. At this stage, cash flow positive, so the offset does not contain any borrowed money.
    Are you suggesting that this method is not good and that perhaps the next time I refinance, I should consider a LOC?
    Following on from Terry's point above, are you suggesting that LOC is used only for expenses and rent & loan repayments paid from offset account?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sorry your mention of 'contamination' lead me to believe you were considering whether to borrow via a LOC product or borrow and park in an offset account.

    If you are using both then there should be no contamination problems if you
    1. Borrow from the LOC for investment purposes and
    2. put all incomes and cash into the offset account

    There is no need to worry about mixing cash in an offset account and there is no related interest.
     
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  10. DaveM

    DaveM Adelaide Buyers Agent & KFC Strategist Business Member

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    Cleaning my floors, comes up nice and shiny
     
  11. Hedgy

    Hedgy Well-Known Member

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    So I was thinking over the weekend about this LOC. It occurred to me that in additional the putting expenses directly related to my IP through the LOC that I also have a number of recurring personal tax deductible expenses that are NOT related to my IP. Things such as income protection insurance, professional organisation membership, etc etc. Given that these non-IP related expenses are deductible (I've been doing it for years) can I put those expenses through my LOC as well? For example, I'm currently paying around $7000 a year for my income protection insurance maybe I could push that through my LOC and instead claim the interest as a deduction?
     
  12. Scott No Mates

    Scott No Mates Well-Known Member

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    Great point @Hedgy - but do you still get the deduction for the expense even though it is unpaid ie you've used borrowed funds so the bank has paid the expense not you.
     
  13. Hedgy

    Hedgy Well-Known Member

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    If I understand your question correctly wouldn't the same logic apply to putting IP expenses through the LOC?
     
  14. Scott No Mates

    Scott No Mates Well-Known Member

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    That's precisely why I ask, all that you've paid/paying for is the interest component not the expense
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you borrow to pay the expense that is still paying the expense.

    It is like borrowing to pay $10k LMI on an investment property. You haven't paid it out of your pocket, but you have still paid it and still have incurred the expense - and can claim $2000 per yer in this case even though the extra interest is only about $400 per year. (you would be $1600 per year ahead during the first 5 years - but the $400 extra interest would continue for the life of the loan.