What is the most effective way to manage multiple IP's?

Hey All,
Back on SS I was asking about the most effective way to manage a single IP but now I am keen to understand how you best manage multiple. When I say manage I refer to the structure and tax maximization.

There are 2 scenarios I am keen to explore.
Scenario A = 3 * IP's, NO PPOR
Scenario B = 3 * IP's, PPOR with 100k useable equity.

From my limited understanding then in A you simply have an offset against the IP with the highest interest rate and then all payments (salary/rent) go into this offset and all expenses (interest, expenses, personal) come out of this offset??

In B however it can get much trickier because you could potentially have a LOC from the PPOR in which to pay expenses and MAYBE intetest (hearing ATO ruling?)

 

Pretty sure the ruling from the ATO is crystal clear.

 

Yes, that is interest on interest is deductible unless it is being done as a scheme to pay off the home loan sooner.

 

Nothing tricky here. You would just have the offset on the non deductible PPOR part.

 

My thoughts exactly.

Keep it simple.

Place an offset against the PPOR - income/expenses come out of it.

If you don't have a PPOR - place offset against IP loan with highest rate.

Cheers

Jamie

 

On SS I just remember reading a heap of threads about using a LOC to maximum benefit.

But is it really as simple as, get an offset against PPOR. All income (salary/rent) goes into this and absolutely everything comes out of this including property expenses and interest payments?
If capatilising interest is not allowed, what about a LOC for expenses so that the interest can be claimed on those? Or even a pure investment Credit Card?

 

Yes, its that simple.

On the face of it a LOC can be used to borrow to pay investment expenses, other than interest, but just get advice on the possible application of Part IVA to deny the deduction.

You can also speed things up by debt recycling. Borrowing to buy income producing and capital growth assets and using the income and or capital gains to pay down the non deductible debt sooner (and then repeating).

 

As always, thank you Terry!

 

Hi Jamie. What about the pre-purchase costs (e.g. B&P inspection) and items like insurance, ongoing property maintenance, etc. Do those items also get paid from PPOR offset? If so, from what I understand, the only thing paid from equity is the initial IP deposit. Does this sound right?

Also, if in future I plan to do some renovation of an IP the cost can be paid from equity as the interest will be deductible. Is this correct?

 

More tax effective to borrow for investment expenses.

 

Terry , Jamie , Just clarification

I'm assuming that the above is based on still owing money on your PPOR .

If you have an IP with equity and have an LOC on this , and use this to pay for interest payments on another IP mortgage when that second IP is cash flow negative , that is allowed , correct ? ( ie there is no PPOR loan that is being preferentially paid down )

Michael Yardney is one of many who support using equity to pay for shortfalls in cash flow with existing equity .

Cliff

 

Borrowing to pay interest is deductible, but the deduction could be denied if it is a scheme to produce etra tax deductions. ATO have said they can deny the deduction of extra interest where this is done to pay off the home loan sooner. So far they haven't issued anything that would suggest that borrowing to pay interest on interest wouldn't be deductible where there is no PPOR debt.

 

I often get asked about seeking to compound interest deductions. I'm not a believer. Not because of the ATO, Rulings etc.

Its a trivial value. 5% of 5% is a very small number. Its like worrying about the cost of a stamp when you mail a $5,000 cheque. There aren't that many IP expenses you can pay that way and even if you did it would take a long time and a huge deal of inflated debt before it became worth $1k.

Its far easier to spend $1k and improve the property by $1k than it is to seek a tax outcome that hands back $1k as a refund.