Deposit without the baggage?

[BruceW]

All,

I've been interested in property investing for quite some time now and been a regular lurker in these forums, however I'm afraid I've been falling into the 'Gunna' cateogory. Having said that I'm trying to make positive steps towards fixing this!

I'm in the situation at the moment where I've got equity to use but havent restructured my finances to give me easy access to it.

I currently have a professional package with Westpac but our PPOR is financed as a simple loan with redraw.

If I were to need a deposit in the next few days (thinking of attending a mortgagee auction) then how can I get access to the deposit I would need on the day.

I guess Im trying to 100% finance, only after the fact.

I'm under the impression that if I were to simply take the cash out of the offset account then I can't claim the interest that i am effectively 'paying' due to that money no longer being there. In the eyes of the taxman this is a cash deposit right? This is the principle behind setting up a LOC isn't it?

Is there another way around it? Any input appreciated

BruceW

 

[Jas]

got it in one. it's your money you put in, so its a cash deposit.

Oragnise a short term loan, a personal loan, your credit card.

Let this one slip by and get your finance organised for the next one.

Lots of options really.

Jas

 

[BruceW]

OK,

So if I used my credit card, can I then sort that out when i do the finance (ie pay off the loan with the LOC on my PPOR) once I restructure?

 

[Mondie]

l may have the wrong end of the stick here but last year we purchased a holiday rental apartment off the plan and paid a cash deposit. Come tax time my accountant said the interest paid on our HL as a result of redrawing the deposit from our HL wasnt tax deductible because we didnt as yet own the proprty to claim against.

Maybe its a dfferent situation if you setup a seperate loan for the deposit? Anyone know?

 

[geoffw]

Mondie,

I'd be asking Dale what he thought. I thought that the purpose of the loan was important when claiming the interest.

Dale?

 

[BruceW]

Mondie,

My understanding was just that. A redraw off a PPOR isnt a loan, its cash. The fact that it has an effect on your PPOR mortgage is a side effect i guess.

I originally saw a broker about 12 months ago. His approach was to restructure as follows on my (first) IP at the time:

1. An investment loan to cover the IP deposit.
2. Another investment loan to cover the loan
3. Set up a LOC on the remaining equity in the PPOR to
facilitate further purchases.

It seemed ok at the time, but its just I wouldn't have time to refinance at present and wondered if there was another way around it.

 

[Jas]

Originally posted by geoffw
Mondie,

I'd be asking Dale what he thought. I thought that the purpose of the loan was important when claiming the interest.

Dale?

Hey Geoff, you're right.

However in this case he's not borrowing money for the place. He's simply using cash that he had parked elsewhere.

The fact that the cash was parked in an offset account makes not difference.

This can work in his favour - should he wish to make his PPOR into an IP, he can take the money from the offset and place it in another offset for a new PPOR. His still has the full loan amount against it, and no offset, so he gets the full deduction.

Jas

 

[Jas]

Originally posted by BruceW
OK,

So if I used my credit card, can I then sort that out when i do the finance (ie pay off the loan with the LOC on my PPOR) once I restructure?

Yep - HOWEVER, you need to make sure you can carry the debt in the meantime. 17% isn't something you want to carry for a while.

OTOH - I got sent a 6.5% pre appoved CC. It was only for 12 mths, and then the rate shot up, but in those 12 mths, I used the card for a deposit. I was happy to have 55 days interest free and then carry 6.5% for a while

Jas

 

[Simon]

Purpose of the loan

My understanding is that it is the purpose of the loan that makes it a tax deduction rather than the source of the loan.

So should you take $50K from a home loan to purchase an income producing property then the interest on this component is deductable.

However if it is a deposit and the IP purchase isn't settled or isn't producing taxable income in the financial year then it wouldn't be a deduction in that year.

I hope this helps.

Cheers,

 

[XBenX]

simon,

sounds correct to me.

i think in this situation, as Jas said - it wasnt a loan, they just reduced the balance of the offset a/c.

 

[BruceW]

Its not actually an offset as such (no separate account) it just has a redraw.I pay all surplus cash into it. Does that make a difference?

I think maybe I might just use the cash as a deposit, at worst I just cant claim the interest on that portion I suppose. I don't think its worth missing out on for the sake of that if the price is right (probably only talking about 13k)

Thanks for the help guys

 

[Jas]

Originally posted by BruceW
Its not actually an offset as such (no separate account) it just has a redraw.I pay all surplus cash into it. Does that make a difference?

Sorry no. As an example, you have a loan of 300k. The purpose of the loan is for your PPOR. so, no deduction. You have 100k in cash, which you place on the loan. Purpose of the loan still - to buy your PPOR. Still no deduction.

You redraw the cash to use as a deposit. Still the purpose of the loan is to buy a PPOR.

One thing you might be able to do (if you have a trust) is lend money to the trust at the same rate that you are charged. But my impression is that you haven't had the time to set one up...



I think maybe I might just use the cash as a deposit, at worst I just cant claim the interest on that portion I suppose. I don't think its worth missing out on for the sake of that if the price is right (probably only talking about 13k)


Worst case senerio, yes. Work your sums. If it still works, go for it.

Personally however, I'm in favour of letting this one go. Mortgagee auctions are rarely the deal of the decade that the books say they are (esp. the US ones). Get everything set up right and then move forward. There'll be another bus along any minute.

Jas

 

[BruceW]

OK,

So am I heading up the right path with my way of thinking..

Here's my scenario:

PPOR value about $280k
Still owe ~90K

should i be aiming to refinance down to ~90K and set up a LOC against PPOR ?

I think it would be around ~130k leaving my PPOR at 80%

 

[Jas]

That's about right.

Depending on whether you want to sell your PPOR or turn it into an IP (down the track), one product might be useful for you is a St George one.

You can set up a LOC and P&I loan against your house. With one phone call you can adjust the amounts in the two loans (provided the total amount remains the same).

So you won't run into this situation again. As you pay down your P&I loan, you can reduce the loan limit on the P&I, and increase the amount of the LOC.

Jas

 

[Mondie]

Re: Purpose of the loan

Originally posted by Simon
My understanding is that it is the purpose of the loan that makes it a tax deduction rather than the source of the loan.

So should you take $50K from a home loan to purchase an income producing property then the interest on this component is deductable.

However if it is a deposit and the IP purchase isn't settled or isn't producing taxable income in the financial year then it wouldn't be a deduction in that year.


Yep, this is my understanding from what my accountant said at the time too. We missed out last year on the deduction, but should be able to claim it for 2002/03 up until when we settled last month.

Thanks Simon

 

[XBenX]

Mondie - whether its redraw from your PPOR or in an offset the same rules still apply...

Does that make sense ? I think Jas has covered it all Im just correcting/expanding on my previous post

 

[BruceW]

Maybe I'm not getting it,

What Mondie was suggesting is exactly the situation I think I'm in, however he/she seems to thing that it is deductable?

I though the issue was that if you take 50k out of your PPOR loan its not a loan, its cash....

If what he/she saying is true then I can claim interest on that 'portion' of my PPOR loan..That doesnt seem right

 

[Mondie]

Hi Bruce,

Here is an example from our situation;

Redrew $23k from HL in feb last year for an OFP purchase. had my 2001/02 tax done and tried to claim the interest against the property but since we hadnt settled, accountant said there was no investment property as yet to claim against. Makes sense.

We settled on this property early this month so come 2002/03 tax time will now be able to claim interest on the deposit because we have the propert to claim against.

My accountant said that provided we can demonstrate that the money came from our HL and went to the OFP purchase then we can claim. This can easily be done with loan statements and check receipts etc.

Can anyone confirm??

PS My real name is Simon, Mondie is one of those bizzare nicknames you pick up over the years

 

[Jas]

My accoutant laid it out the way I've explained, Monie's another. Dale, comments?

Jas