Capitalise Interest and Paying Rent off your own home

I have just received a PBR from the ATO agreeing that letting the interest capitalise on a rental property loan and using the rent to pay off your own home is not caught by Part IVA in the circumstances I outlined. Open the flood gates this means my client will be able to shift all her non deductible debt to deductilbe debt in about 5 years.
 
Thanks, Julia. I love it!

Just setting up my LOC now to get cracking on demolishing the PPOR debt.

I think it's a great strategy and another positive aspect of having IPs.
 
This is a private ruling for my client only, you cannot rely on it and the ATO will try to narrow it. It is important that you can prove that the rental will eventually become positively geared. You should apply for your own PBR first.
 
Hiya Julia

Did u say the ATO will "try " to narrow that :). I recall they subscribe to the Yoda school ? They will find a way to close the window for others in the middle term im sure.

ta
rolf
 
The salary sacrifice arrangement that I used to talk about lasted 15 years before they changed the law, in fact they still haven't. Just announced they will. With both the salary sacrifice arrangement and this redirecting rent to your own home changing the law will have major ramifications so don't expect it to be happening anytime soon. In the meantime most people will be able to get their home loan paid out in less than 5 years. So make hay. But get a ruling so they can't single your circumstances out or go retrospective.

I will be putting an article on this in API probably November's edition.
 
I have just received a PBR from the ATO agreeing that letting the interest capitalise on a rental property loan and using the rent to pay off your own home is not caught by Part IVA in the circumstances I outlined. Open the flood gates this means my client will be able to shift all her non deductible debt to deductilbe debt in about 5 years.

Hi Julia,

What is the reason your client gave for why they wanted to do this?

If the ATO asks "why do you want to direct rental income towards paying down personal debt?"

Obviously the answer can't be "because it is more tax effective"

Is the answer as simple as "I want to pay off my personal home-loan more quickly"

ATO: "Why do you want to pay off your personal home-loan more quickly?"

Client: "Because it is more tax effective will provide security for my family"


It is important that you can prove that the rental will eventually become positively geared.

Is the proof as simple as this...

"When I have finished paying off my PPOR I will start to pay off the investment debt. Also I expect the rental income to increase over time. When the rental income exceeds the interest repayments then the property will become positively geared"

What else could one say to prove it?

I have (so far) never directed my rental income towards my PPOR loan, but I am keen to do it if I can be fairly confident that the ATO will accept those answers I give above.

Cheers,

Shadow.
 
I always thought it was better to have a reason to re direct the rent, like an accident that stopped you working for a period. I was gonna get around to applying for a ruling when my wife got pregnant.... Havent quite got around to it yet though.
 
A tax benefit is ok as long as that is not the sole or dominant purpose. Most people spend half their working life trying to pay their home loan off as soon as possible. Just because there is a tax benefit in the arrangement doesn't suddenly make that action a scheme with the sole dominant purpose of a tax benefit.

Don't do it without a ruling on your particular circumstances.
 
Whilst I have not yet done the sums yet, I struggle to see how debt recycling can benefit you financially long term more-so than not recycling the debt and pay off a PPOR in the normal way.

I can briefly imagine the costs of recycling this debt

May as well take a quick look now huh?

3 investment properties, $1 million purchase value with good equity to have the ability to withdraw the capitalised interest in the first place, 1x PPOR with a purchase price of $500,000.

Principal and interest repayments would be somewhere around $600 per week at 6% rates (vague, I know but quick calcs here.)
So we will forget about rates or any of that stuff for now.
$31,200 per annum minimum payment.

Lets assume we receive $1000 per week from the 3 investment properties combined, and earn $50k per annum minus living expenses and manage to pay $25,000 on-to the home loan, which is $77,000.

Our debt recycling would look something like this:

Rates $3700
Landlord protection insurance $1200
Property management fees $3640
Repairs and maint $1700
Annual Interest bill for 1st year at 7% rates (paying on $1,070,000. $70,000

So add those sums together and we have a total of $79,140. Lets throw in the extra $860 for say.. pro package fees, just to make things even.

Lets add 7% compounded growth on-to our million dollar portfolio (which is actually say.. 1.5 Million as we were able to draw off this in the first instance) plus the $500,000 PPOR which when added together now reads as $2,140,000.

And if I could be bothered we may get somewhere with these findings but hey.. I don't have time! Perhaps someone else would like to pick up where I left off?

I'm still not sure this method would make as much sense as it may seem at first glance long term.

This illustration can also be used to show approximate equity growth for future purchases or those who are considering living on equity in the future. Even if just for a little while.
 
Hi Investor

Not sure exactly what you are asking, but...

in your eg there are $80,000 in ip expenses. These could be paid for by using a LOC. That means you have $80,000 extra to pay into your home loan in that year (because otherwise you would have had to pay this).

your home loan reduces by $80k, but your LOC increases by $80k. overall the total loans are the same but you have increased your tax deductible debt by $80,000.

at 6% pa that would be about $4,800 in addition interest you could claim. On the top rate that would save you about $2200 in tax in the first year.
 
Hi Terry, thats assuming you were on good money but with the 3 IP's without capitalising interest you would receive around $8500 per annum tax back, you would have only paid around $10,000 in taxes all year so you would not really see the full deductibility.

All I'm saying is, I don't really see much point in doing things this way once the numbers have been crunched, apart from going quite deep into debt and losing more money in the form of capitalised interest. But the other side is (obdviously) the home loan would dissipate within a few short years.

My question is this: Is it really worth it?
I imagine in some cases, yes, it would be. Such as a highly paid individual. For a run of the mill employee earning $50k a year, I don't think it would be.
 
Hi Terry, thats assuming you were on good money but with the 3 IP's without capitalising interest you would receive around $8500 per annum tax back, you would have only paid around $10,000 in taxes all year so you would not really see the full deductibility.

All I'm saying is, I don't really see much point in doing things this way once the numbers have been crunched, apart from going quite deep into debt and losing more money in the form of capitalised interest. But the other side is (obdviously) the home loan would dissipate within a few short years.

My question is this: Is it really worth it?
I imagine in some cases, yes, it would be. Such as a highly paid individual. For a run of the mill employee earning $50k a year, I don't think it would be.

I think I see what you are saying. With the properties you would have a low income anyway and so the extra addition tax savings wouldn't be so much.

But I think it is still good because overall your loan balances would be the same and the effect of deductions may be increasing exponentially as you save interest on interest etc. Every little bit helps.
 
I think you hit the nail in the head there. All it does is really gives you a reduced rate of interest cost on your PPOR loan. But I hope you guys are simply whacking it in an offset and not actually using it to repay the home loan. My dominant purpose sir was to have all my expenses come out of a payments account and income coming into another account. Thats how I run the property business, just like a normal pty ltd business might have several trading accounts for various purposes.

I don't do this because I love paying tax, or rather my LOC ran out so quickly that I had to start transferring funds back from offset account. GFC was a real bugger!
 
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