Accessing PPOR equity to invest in IP: Top Up or Line Of Credit

[mcarthur]

New value is $550,000. 80% of $550k is $440,000. But you owe $400,000 so there is an extra $40k which you could pull out (subject to servicing). You would set up a new split for $40,000. This is secured by the PPOR.

Purchase the investment property for say $300,000. Borrow 90% or $270,000 against the IP and use the LOC to pay the $30k deposit. IP loan is secured by only 1 property.

No cross collateralising of loans.

Thanks Terry. I get that - the $40,000 is essentially an open loan secured against the property; what it is used for isn't of concern to the bank. Hence using the money for a deposit is fine.
In fact, doesn't it also mean that the interest on the $30,000 deposit is tax deductible since it is being used for an IP to make income?
So not only the interest on the $270,000 is tax deductible, but the whole $300,000 is.

 

[Terry_w]

So not only the interest on the $270,000 is tax deductible, but the whole $300,000 is.

Yes, but don't forget the other $10k used for stamp duty and legals. Interest on the full $310,000 would be deductible.

 

[CosmicTrevor]

That is reasonable. Nothing wrong with this.



My main worry with this is that you have borrowed in say 2013, parked in offset and then taken out of the offset in say 2014. There is no direct connection with the borrowing and the investing. However, it appears the ATO have accepted this as ok for at least 1 person.

But make sure you never use the offset for anything other than investing and never put any cash at all in the offset.

Thanks again Terry, when you say never put any cash in the offset, the intention was to use the offset as the source of repayments, thus investment income would go into the offset and the bank would take their repayment from same leaving a cash surplus to build over time. So in that sense the offset is only used for investing, but cash would regularly be paid into the account. Is this scenario going to mean interest charges aren't deductible?

Cheers
CT

 

[Terry_w]

Thanks again Terry, when you say never put any cash in the offset, the intention was to use the offset as the source of repayments, thus investment income would go into the offset and the bank would take their repayment from same leaving a cash surplus to build over time. So in that sense the offset is only used for investing, but cash would regularly be paid into the account. Is this scenario going to mean interest charges aren't deductible?

Cheers
CT

Yes that is not a good idea. Your offset contains borrowed money. and you would be diluting this.

 

[CosmicTrevor]

Yes that is not a good idea. Your offset contains borrowed money. and you would be diluting this.

Hmmm - a lesson learned!

What about if a second offset was created against the loan, we pay investment income into it, bank draws repayments from it. Original offset is left at its drawn down state and used solely for the purchase of an investment?

Cheers
CT

 

[Terry_w]

Hmmm - a lesson learned!

What about if a second offset was created against the loan, we pay investment income into it, bank draws repayments from it. Original offset is left at its drawn down state and used solely for the purchase of an investment?

Cheers
CT

Not ideal, but it could be acceptable to the ATO. I suggest you consider a private ruling.