Confused as to where to put excess money from IP sale

[MissMuffitt]

Yes it's me again
OK, you may know that we are selling one of our IP's (Call it 2). This property was Xcolled with our old PPoR that is now also an IP (call it 1).
Valuation came back at $330,000 for IP 1, which is good as we have sold IP 2 for less then the loan amount we owe, so we have to UP the loan on IP1.
Bank says LRV to remain at 88% of the valuation $292,000 (Rough)
Our loan on IP 1 is $242,000 currently.
So after we pay out the differance, legal, agents fees, etc, we will have funds left over.
As these properties are IP's, we can not use the money ourselves as it would "Stuff up deductibility" So my questions is this.... where do we put the excess money? put it in the redraw account that is attached to IP1? I think that is the only solution?? This can then be used down the tract to purchase another IP with any luck.

Any other thoughts about this situation??

 

[Pa1nter]

I believe that is the best place to put it as long as it is 100% offset

 

[luckyone]

Don't get confused though. Make sure you have a 100% offset account, this is separate from your mortgage with redraw. If you put it into the IP account directly, it will no longer be tax deductible money if you use it to fund your ppor.

 

[MissMuffitt]

The excess money I was thinking has to go back into the redraw of IP1.
I am with MyRate and they do not have a 100% offset account, only redraw.
To be used for more "Investment" down the track.
I do not and will not want to "Mix" it up with personal stuff.
IP1 loan used to P&I, but with the sale of IP2 I am changing it to IO. I am a bit concerned that there is a limit to the amount you can add to an IO loan each year in excess of your replayments... isn't it only $10,000?
Here is a little snippet from there email I received.

QUOTE:
Please ensure all you note the principal reduction figure on the attached discharge form when returning and note which account/s are being reduced/closed. Figures quoted are based on the LVR remaining at 88%, however if you want to reduce further please note the early repayment fee will increase. The early repayment fee is based on principle reduction amount x 0.6%.

So we don't need to have all the money, but if we pay it down we pay more in early termination fees... I think keeping it for another IP deposit later down the track is the best idea...

Any other thoughts???

 

[Perp]

OK, I think I've figured this out.

I think what you're saying is that your current loan on IP1 is $242K. You're allowed to increase that loan up to $292K, but you don't need the entire $50K (being released by increasing the limit) to close out IP2, right? Say you only need $30K to close out IP2, there's $20K cash left over.

The "early repayment fee" relates to the fact that your loans are decreasing from, say, combined $550K ($242K for IP1 plus an invented guesstimate $308K for IP2), to $292K, or possibly down to $272K (if you decide not to take the extra $20K left over as cash, but instead further reduce your mortgage).

OK, bad news first. I'm not sure whether anything above the $242K is going to be deductible. I'm not sure whether the $30K that's necessary to borrow to sell the investment is deductible. I suspect it is, but I'm asking myself when the ATO would require this loan to be repaid, as presumably you can't claim interest on a $30K loan for a loss indefinitely... so perhaps an accountant can comment on whether the interest on the $30K is deductible on an ongoing basis.

The interest on the $20K from $272K to $292K definitely isn't deductible, at least until such time as you use the $20K for investment purposes. If you increase the limit to $292K with a $272K balance, provided any extra costs that move the balance up are for investment purposes, you should be OK.

But because you have a redraw, this is going to be a nightmare in terms of your own book-keeping. You're going to have to maintain separate sub-accounts for the $242K (and capitalisation and expenses on IP1) that relates to IP1, the $30K that relates to the losses of IP2, and, if applicable in future, the $20K that you draw for IP3. Each time that interest is charged (eg monthly), you're going to have to apportion it between the 3 sub-accounts with regards to the balance of each of these sub-accounts, because they'll change each month.

If you redraw the $20K for private purposes, it will be even worse, as you'll have a portion of interest deductible, and a portion non-deductible.

I don't envy you.

 

[MissMuffitt]

OK, I think I've figured this out.

I think what you're saying is that your current loan on IP1 is $242K. You're allowed to increase that loan up to $292K, but you don't need the entire $50K (being released by increasing the limit) to close out IP2, right? Say you only need $30K to close out IP2, there's $20K cash left over.
That is correct, if I want less, I will have to pay more "early repayment fee"

The "early repayment fee" relates to the fact that your loans are decreasing from, say, combined $550K ($242K for IP1 plus an invented guesstimate $308K for IP2), to $292K, or possibly down to $272K (if you decide not to take the extra $20K left over as cash, but instead further reduce your mortgage).

OK, bad news first. I'm not sure whether anything above the $242K is going to be deductible. I'm not sure whether the $30K that's necessary to borrow to sell the investment is deductible. I suspect it is, but I'm asking myself when the ATO would require this loan to be repaid, as presumably you can't claim interest on a $30K loan for a loss indefinitely... so perhaps an accountant can comment on whether the interest on the $30K is deductible on an ongoing basis.I am going to ring my accountant on Monday to see what he says is the best thing to do...

The interest on the $20K from $272K to $292K definitely isn't deductible, at least until such time as you use the $20K for investment purposes. If you increase the limit to $292K with a $272K balance, provided any extra costs that move the balance up are for investment purposes, you should be OK.

But because you have a redraw, this is going to be a nightmare in terms of your own book-keeping. You're going to have to maintain separate sub-accounts for the $242K (and capitalisation and expenses on IP1) that relates to IP1, the $30K that relates to the losses of IP2, and, if applicable in future, the $20K that you draw for IP3. Each time that interest is charged (eg monthly), you're going to have to apportion it between the 3 sub-accounts with regards to the balance of each of these sub-accounts, because they'll change each month.That is totally a Nightmare alright!! Bugger, all I wanted to do was get the debt down a bit...

If you redraw the $20K for private purposes, it will be even worse, as you'll have a portion of interest deductible, and a portion non-deductible.Will defiantly not be doing this!

I don't envy you.

Thanks for all of that info... And yes it really is not looking like a good thing that they want to keep the loan at 88%...