Debt shuffling and tax deductibility

Discussion in 'Accounting and Tax' started by LegallyBlonde, 7th Jun, 2015.

  1. LegallyBlonde

    LegallyBlonde Member

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    Hey All! I have had a great time reading your forums for the last few months and I finally got around to signing up! I am really excited to join the SS club ;)

    A little about me... I am 20-something just finishing up my undergrad studies which is very exciting! On an impulse of sorts with only 22k notice of assessment I managed to buy IP1 earlier in this financial year (YEAH). With graduation looming and a job where I can get full time hours straight away my borrowing power is about to significantly increase! I have always loved realestate but I am planning on being far more strategic with my money and purchases in the future! I have the art of living on the smell of an oil rag down to an art form and look forward to throwing all of my disposable income at realestate for the foreseeable future! I admit I am pretty excited to see what I can do with a 'real' (read: full time) income!

    For my future/hypothetical IP2 I have a 10% dep and 5% closing costs and the other 10% will be secured against mothers property.

    Future hypothetical for loan structuring purposes?
    IP1 Loan: 4.84% (fixed: NO OFFSET: YES REDRAW)
    IP2 Loan: Lesser rate!

    Obviously I will be wanting to put the funds into IP1 for the short term as it has a higher interest rate.

    Am I able to move these surplus funds from IP1 loan into IP2 loan without affecting the deductibility of the interest on IP1 loan? Both will be remaining IP?s but I am not sure if the moving of this money is an appropriate ?investment purpose?. I would like to save interest on IP1 given the higher interest rate but may in the future need to pay down debt on IP2 to release guarantor.

    If this is okay that would be ideal.... If it will bugger me up tax wise obviously I will not bother and just suck it up and pay disposable income into IP2 loan!

    Any thoughts would be greatly appreciated!
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    I'm not a tax guru but I'm 99.9% sure it would be fine to do what you're suggesting.

    One idea though -why not use your mum's property for the full 20% plus costs, and put all your extra funds into IP1 until the time comes to release the guarantor?
     
  3. Hooray

    Hooray Member

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    Nice of you to risk your mother's property.
     
  4. LegallyBlonde

    LegallyBlonde Member

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    Hey Jess! Thanks for the speedy reply!

    That is a particularly good idea! The only slightly inhibiting factor is that IP1 loan only allows me prepay approx 47k... But you are right it is certainly better to keep as much surplus funds in IP1 Loan as possible to minimise interest payments.

    Only 14 more months until IP1 fixed period is up!
     
  5. datto

    datto Member

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    what could go wrong?
     
  6. LegallyBlonde

    LegallyBlonde Member

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    Hooray... Not that it is any of your business... But I live out of home (but I do not pay), in a month I will be working full time at my well paid job and am only looking at properties in my area of interest that have a 6% return... Whilst I am not risk adverse with my own assets.. I would not risk hers... I know that... She knows that... As such, my current risk profile is very conservative!
     
  7. Hooray

    Hooray Member

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    Er, ok. Your not risking her assets by using her as guaranter.
     
  8. Terry_w

    Terry_w Member

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    One loan will be refinancing another so interest deductibility will remain. But you will end up with loan 2 being mixed purpose. Part of the interest will be for property A and part for property B so you will need to apportion interest.

    If both are interest only this should be easy to do. But if you ever pay into the loan the payment will come off both portions. If ever you sell either properties you would need to split the loan first to pay off the relevant portion without effecting the other loan.

    Overall not really a good idea unless the savings will make the extra fuss worthwhile.
     
  9. LegallyBlonde

    LegallyBlonde Member

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    Bugger... I had a sneaking suspicion that may have been the case Terry since I was not using the funds to acquire new investments. Nope certainly not worth the fuss! Especially with the timeline I will be paying out IP2 loan in! Thanks for your reply.
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    If she splits the loan though, (after the fixed rate is up and before repaying IP2) this wouldn't be an issue right? It would be the same as if she used equity to purchase a new IP.
     
  11. Terry_w

    Terry_w Member

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    Yep, if the loan is split it will be much better.