deductibility

hi guys

i guess some newbies fall into the trap of redrawing from their loan (for personal use) thus screwing with deductibility. most forumites would say sell but what options are there if they decided not to sell?

i read that you can only deduct a percentage. lets say the remaining loan is 150k and 50k was redrawn which takes the loan back to 200k. this percentage is 75% and does this only apply to the loan interest or does it also apply to other deductibles such as landlord insurance, rates, body corp, PM fees, etc?

would paying off the loan be an option?
 
It only applies to the loan interest, and repayments.

Once you redraw again for deductible items, such as rates, insurance etc, it changes the deductibility percentage again. It becomes a nightmare for your friendly accountant!

eg - from your example, Total loan $200,000 - $150,000 deductible, 75%.
You pay repairs of $10,000.

Total loan now $210,000 - $160,000 deductible - 76.2% of interest and charges deductible.

Re: paying off the loan - You can't pay off the non-deductible amount first, any payments are treated as reducing the whole balance. This is of course assuming you don't have a split loan.
 
hi guys

i guess some newbies fall into the trap of redrawing from their loan (for personal use) thus screwing with deductibility. most forumites would say sell but what options are there if they decided not to sell?

Use an offset account - same effect, but not deemed as having paid off the loan, so the money can be drawn down without tax implications. Took me a while to get my head around this.

Won't help you if the money is already "trapped" in repayments.

Cheers,

The Y-man
 
Split the $50k (non-deductible) into a separate account now. Then work towards paying this off. This could save you a lot of pain in the future.

Outside of the interest costs, all other costs for the property (rates, etc) should still be fully deductible.
 
Even though the interest rate is higher, it would be better overall to get an old-fashioned personal loan if necessary for a personal expense and pay it off as quickly as possible.
Marg
 
Split the $50k (non-deductible) into a separate account now. Then work towards paying this off. This could save you a lot of pain in the future..

i'm not sure what you mean by split. how is this done? i thought once you redraw, there's no way of repaying the amount redrawn.

Outside of the interest costs, all other costs for the property (rates, etc) should still be fully deductible.

woohoo! :D in this case, 75% deductibility on interest costs don't sound like its too much of a hit compared to the cost of selling and buying another IP
 
are you referring to the principal amount of the repayment? i thought you cannot claim this but only the interest charged on the loan?

Yes, it is just the interest. What I meant was that once a loan is 75% deductible, you can't repay the non-deductible debt first (unless you split the loan).
 
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