Better to pay off loan balance or to keep a loan for tax purpose?

[rodimus]

If I have a investment property with a loan of $120,000 for 2 properties worth about $1million, will it be better paying off this loan? The rent more than covers for this.

Because if I pay off the loan, then no money is wasted on paying interests to the bank.

If there is no loan, then more rental income becomes taxable at 30%. My friend is telling me, if I earn $1, I only pay about 30c. But if I use the whole $1 to pay interest to the bank, I get nothing. Makes sense?

My accountant is telling me to keep a small loan balance, for tax purposes....

 

[coastymike]

Accountant not thinking like an investor or business person.

Question shouldnt be should I keep the loan outstanding for tax purposes.

Question should be what is the opportunity cost of capital. If the loan is repaid then sure you save on interest. But what is the after tax return on capital for investing those same funds elesewhere. If the after tax rerurn on capital is higher than the interest being paid then you would be better of keeping the loan outstanding and investing those funds elsewhere.

 

[Paul@PFI]

Sometimes a small loan balance is smart. It leaves a redraw / LOC available. Some loans are closed out on final repayment. Ignoring any income or deduction issues it can be smart to leave a trivial loan balance and not fully repay the loan. It means you have a ready LOC that can be drawn without application perhaps ??

Mikes thinking is spot on....If you have the funds to repay then weight up pro's and cons...If you can invest the cash and on an AFTER tax basis the return through shares (by way of example) is better than loss of the deduction etc then do it.

Opportunity cost of money....Problem is the crystal ball batteries are flat.

 

[Terry_w]

It all depends...

On cashflow
Who owns the property
family situation
what you could otherwise do with the money

e.g. You may have a non working spouse and could gift the savings to her/him to invest.

or

you could pay off the loans and reborrow to invest

or

you could periodically gift money to a discretionary trust to invest and then use this to divert income to the lower tax payer

or

you could divert money into super.

etc