Funding Maintenance from IP Loan

[chris1]

Hi All,

What would be regarded as the best method of paying maintenance on my IP?
eg. Recently I had a $2000 maintenance bill for some work on my IP. (I have my PPOR & savings account accounts separate to my IP accounts). Till now I have had funds in the IP savings account to cover costs, just from rental payments, but this $2000 caught me short. Therefore I drew down a further $2000 from my IP loan, I didn't want to use my own cash.

Is there any problem with this from a tax perspective?

cheers,
chris1 :)

[always_learning]

Hi All,

What would be regarded as the best method of paying maintenance on my IP?
eg. Recently I had a $2000 maintenance bill for some work on my IP. (I have my PPOR & savings account accounts separate to my IP accounts). Till now I have had funds in the IP savings account to cover costs, just from rental payments, but this $2000 caught me short. Therefore I drew down a further $2000 from my IP loan, I didn't want to use my own cash.

Is there any problem with this from a tax perspective?

cheers,
chris1 :)

There is no problem at all in drawing down your IP mortgage to pay for IP repairs. Many on this forum use a line of credit which they use for exactly these things. Particularly if you have your own home and mortage (PPOR) it is much better to draw down your IP loan.

A few years ago I had one of my IP's renovated for $25K afterwards the value of the house was $40K more and the rent increased $100pw, a 20% p/a return on investment. But I did it using my after-tax savings....I feel foolish now, I should have done it early and taken on a little more debt.

[JPM]

Spot on AL.

I do the exact same thing you mentioned. By having an LOC for ALL investment expenses(management fees, rates, maintenance, etc) you only have to pay the interest out of your rent while the rest can go towards reducing your PPOR loan. This can make a BIG difference if you have a number of IP's which are high yielding. And of course the interest on those expenses is tax deductable which makes it a little better too.

The above strategy is useless if you are not paying off 'non-deductable' interest (PPOR).

Regards,
Jason

[Thommo]

I do things differently.
I deposit into the most convienient account, withdraw from whatever account has sufficient funds and use my credit cards for everything I can. Rent recieved goes into my cheque a/c because it is easy for the tennant to pay that way. The Lady's pay goes into the LOC because we then get full offset. Then I transfer between them as I wish. Did I mention I trade shares? Again paid from/into either a/c.

A nightmare? No! I run a biz so every a/c must be reconciled in Quicken anyway. My Lady's CC is the only one not broken down but it is paid out of the biz a/c and called "drawings".

Quicken allows full flexability. It used to be cheap but sadly is not so any more.

Thommo.

[chris1]

Thanks JPM and Always Learning,

It's Mrs Chris1 here, and I am having a difficult time getting my head around these figures. :confused:
Please tell me if I am on the right track!
Instead of paying expenses over and above the rent total out of after tax money (which is only 1/2 of the real dollars we earn) and claiming tax deduction, we continually increase the loan amount, payng only tha extra interest ( which is also tax deductable).
So, continually drawing down reduces costs now, but will reduce capitol gain in the long term? Is this simplistic view correct?
With depreciation you get extra money now, but that much less when you sell?
Basically both strategies appear to give you more cash in todays money to pay off ppor, or continue to invest.
I am sure (not!!!) that one day it will all makes sense to me!
Thanks guy's
Mrs Chris1

[chris1]

Hi Thommo,
How does that all work at tax time?? And what is the lady's CC??
Thanks

Mrs Chris1

[JPM]

Chris 1,

You are on the right track. What you are doing basically is increasing your deductable debt while reducing your non-deductable debt. You are paying the expenses out of your LOC and not touching rent(except for interest of course) so the rent goes straight into your PPOR loan.

You end up paying the same amount of interest either way, it's just that you can claim it as a deduction if it's for IP purposes. Therefore paying less tax!!!

Also what Thommo said about the credit card is what I am doing. I have 55 days interest free so I put the bill on that giving me the use of the banks money for that time.

Jason

[chris1]

Thanks JPM.
Its all becoming increasingly clear!!!

Mrs Chris1

[Tasman]

Hi,
Have just registered with Somersoft and found posts interesting and informative. This thread on paying IP expenses from IP loan accounts has higlighted the basic issues, but seems to have raised some peculiar details.

To me the basic issues as a personal investor rather than a business operation are:
You can pay IP expenses from any account, and simply need receipts to verify the deductable expenses were incurred for taxation purposes.
I have all salary and all other income (rent) deposited into savings offset account (offset to home loan account), to reduce my non deductable interest on PPOR. Another dedicated IP transaction account would be counter productive in reducing non deductable interest.
I do have LOC which was used for deposits and other costs associated with purchase of IP's. At the moment it is at its maximum limit awaiting a topup. However the lender for the LOC is mildly conservative and I appear to have reached my sercviceability limit and are considering refinancing to further raise limit. Equity for topup is not an issue at this stage.
As all income/revenue is deposited into offset account, it follows all expenses are paid from this account, ie; keep money in offset account as long as possible. Credit cards paying bills could help retaining funds in offset account, but in my calculations are pretty trivial and more a benefit to the credit card provider, and an enticement to spend more on consumer items.

The forum has confirmed that I could capitalise 'all' expenses in a loan account such as LOC
(Except investors are awaiting the outcome of the High Court hearing of the ATO office appeal in the HARTS case to disallow capitalising mortgage interest expense. The High Court has heard the appeal and is considering its decision, due about May 2004).
It appears to me that if I wished to capitalise expenses that are allowable from an ATO point of view, I would need to constantly raise the limit on my LOC, which could be possible practically on an annual basis.

The key point that I question from this discussion is the assertion that interest must be paid from rent and all other expenses can be paid from IP loan/LOC. This sounds most peculiar and is it true? I think the logic may be that you must consume IP rent revenue before you can bill expenses to an IP loan account, is this true? My understanding is that you can bill expenses to IP loan account regardless of how you utilise incoming rent revenue, ie rent revenue can be used to reduce PPOR loan if that is your desired strategy.

[Tasman]

To clarify my last post, it appears that Jasons statement about "must use rent for paying interest" means in a broader context, that you must utilise all IP revenue to pay IP expenses before you can bill and capitalise expenses to an IP loan account.

Is this true forrum gurus? Thanks in advance for replies.

[jrc]

I think what Jason is getting at is that because the ATO doesn't allow capitalising interest (subject to the appeal in Hart's case) the simplest thing is to pay the interest from rent and then put any surplus rent into non-deductible debt rather than use the LOC for interest payments and then work out what part of the interest on the LOC relates to interest on interest

[Tasman]

Hi jrc
I agree, thanks for your confirmation, intially I took Jasons comments too literally, and the non deductable "capitalised interest" restriction, would have to be known and assumed to understand the comments.

[JPM]

Hi guys,

Sorry to confuse you. When I said you 'must pay interest from rent' I was meaning that you must actually pay the interest, rather pay the interest from another loan (capitalize).

Jason