Hi all,
I think I may have got myself into a financially dangerous situation from a tax perspective and would appreciate some suggestions on how to rectify the situation.
I currently have no personal debt (PPOR or elsewhere) and have recently transferred my home equity loan from a LOC to an IO home equity loan with another bank after switching mortgage brokers as I wanted to use some personal savings in an offset account to reduce interest paid (LOC doesn?t have offset facility).
The home equity loan is used for deposit plus acquisition costs for a couple of investment properties.
So I got a new home equity loan with a 100% offset account linked to it. I?ll round out the figures below for simplicity sake.
Home equity loan is for $600,000 with $150k already drawn down. At settlement time, the bank fully drew down the loan and deposited the balance of the funds into the offset account ($450k) linked to it.
As I had $150k in cash sitting in a low interest savings account, the plan was to use this to reduce interest on the home equity loan so I deposited it into the offset account. After reading other posts, I now realise this is a dangerous thing to do as I have borrowed funds ($450k) and non-borrowed funds ($150k) in the same offset account. I also believe that if I now withdraw the $150k (non-borrowed funds) from the offset account at a later date and use it for non-income producing assets (which I plan to do in a couple of years) or even income producing assets, I won?t be able to claim a tax deduction on the $150k of debt in the home equity loan, even though I am withdrawing my own savings from the offset account and not the loan account.
I think what I should have done at settlement time when the bank deposited the $450k into my offset account, was to pay it straight back into the loan and use the redraw facility and therefore I could have then put my personal savings into the offset account but hindsight is a wonderful thing.
Is there any way to cleanly rectify this situation as I believe the damage has already been done?
Is there any point at this stage in moving the money the bank put into my offset account at settlement time ($450k) back into the loan and using the redraw facility in the future as required? I only ever plan on using the money in the home equity loan for income producing assets.
It?s not going to be a major deal for the next few years as I won?t need these personal funds ($150k) I deposited into the loan or is it?
If I leave things as they are does that mean that approx. 75% of the interest on any future withdrawals from the offset account will be tax deductible and 25% won?t be (because $150k of the $600k in the offset account i.e. 25% is non-borrowed funds).
Any suggestions on the best way forward would be appreciated.
I think I may have got myself into a financially dangerous situation from a tax perspective and would appreciate some suggestions on how to rectify the situation.
I currently have no personal debt (PPOR or elsewhere) and have recently transferred my home equity loan from a LOC to an IO home equity loan with another bank after switching mortgage brokers as I wanted to use some personal savings in an offset account to reduce interest paid (LOC doesn?t have offset facility).
The home equity loan is used for deposit plus acquisition costs for a couple of investment properties.
So I got a new home equity loan with a 100% offset account linked to it. I?ll round out the figures below for simplicity sake.
Home equity loan is for $600,000 with $150k already drawn down. At settlement time, the bank fully drew down the loan and deposited the balance of the funds into the offset account ($450k) linked to it.
As I had $150k in cash sitting in a low interest savings account, the plan was to use this to reduce interest on the home equity loan so I deposited it into the offset account. After reading other posts, I now realise this is a dangerous thing to do as I have borrowed funds ($450k) and non-borrowed funds ($150k) in the same offset account. I also believe that if I now withdraw the $150k (non-borrowed funds) from the offset account at a later date and use it for non-income producing assets (which I plan to do in a couple of years) or even income producing assets, I won?t be able to claim a tax deduction on the $150k of debt in the home equity loan, even though I am withdrawing my own savings from the offset account and not the loan account.
I think what I should have done at settlement time when the bank deposited the $450k into my offset account, was to pay it straight back into the loan and use the redraw facility and therefore I could have then put my personal savings into the offset account but hindsight is a wonderful thing.
Is there any way to cleanly rectify this situation as I believe the damage has already been done?
Is there any point at this stage in moving the money the bank put into my offset account at settlement time ($450k) back into the loan and using the redraw facility in the future as required? I only ever plan on using the money in the home equity loan for income producing assets.
It?s not going to be a major deal for the next few years as I won?t need these personal funds ($150k) I deposited into the loan or is it?
If I leave things as they are does that mean that approx. 75% of the interest on any future withdrawals from the offset account will be tax deductible and 25% won?t be (because $150k of the $600k in the offset account i.e. 25% is non-borrowed funds).
Any suggestions on the best way forward would be appreciated.