Equity and Tax

[big unit]

Hi,

This has probably been covered but am after some advice/information.

Am currently refinancing my investment property and as a result have access to approx $50k in equity.

In refinancing, my broker has suggested taking the $50k in cash and parking it in an offset account attached to the new loan (effectively increasing my home loan by 50k).

As I am a bit new to this side of things (equity etc) I'm worried at how this could affect my loan for tax purposes.

For example, is my deductible interest calculated as the new loan amount, or the new loan amount minus the 50k. If I were to use the 50k towards a deposit on a PPOR I am sure that my loan would now be a mix of both investment and personal which can't be a good thing?

Can anyone with experience please advise if I should just forget about the equity and only refinance to the amount needed for the loan or if it is a good idea to have access to the equity in cash whilst I am refinancing now and use it later on.

Through my own research, I believe that I should just refinance the loan amount and not worry about the equity at all until I am ready to access it whether it be for investment or personal purposes..

Hopefully this makes sense!

Thanks

 

[Terry_w]

Your broker should be careful. It is likely the interest on the $50,000 borrowed will not be deductible.

You are borrowing to put into a savings account and once there it is no longer borrowed money.

There is an argument that the money could be traced and there is a private ruling to back this up. But the ruling only applies to the person who applied for it. If there is other money in the savings account then certainly the interest will not be deductible in full - Domjan case.

Avoid all of these potential problems by getting a LOC for the $50k

 

[big unit]

Thanks for the quick reply.

Okay the first part makes sense - don't do it.

What I don't understand is the LOC side of it. Would it be better to get the LOC now whilst refinancing or should I wait until I am ready to use the equity (in which case the property should have gained value and more equity should be available - in theory) and apply for the LOC separately when required.

My goal is a second IP in the near future but not straight away as I don't have enough equity and/or cash deposit saved up.

 

[r3ckless]

I have actually done this. What I am doing is repaying the $50k into the home loan, re borrowing the funds as a new loan and which it will be deductible. Having said that when I set up the new loan, I will put the $50k into an offset account directly attached to the new loan. When the property I found I will then use that $50k as my 10% deposit. Any issues with this terry as it's a brand new loan and separate offset account. I'm not a fan of the loc as my lender charges an extra 15bps for the facility

 

[Terry_w]

I have actually done this. What I am doing is repaying the $50k into the home loan, re borrowing the funds as a new loan and which it will be deductible. Having said that when I set up the new loan, I will put the $50k into an offset account directly attached to the new loan. When the property I found I will then use that $50k as my 10% deposit. Any issues with this terry as it's a brand new loan and separate offset account. I'm not a fan of the loc as my lender charges an extra 15bps for the facility

My above post applies. I wouldn't recommend it.

Also if you had withdrawn money with the interest non deductible and the other part of the loan is deductible then you have created a mixed purpose loan. When you make a repayment you cannot chose where it goes. It comes off both portions in accordance with their percentages.

So repaying funds could make it worse. What you would need to do is to apportion the loan - work out deductible and non deductible portions and then split the loan. Once split you can repay the one that is not deductible.

 

[r3ckless]

I think i have miswritten-

I have a $30k home loan. This portion is deductible. I borrowed $50k as a top up on this loan and the loan purposes was renos to my inv property. The $50k was kept in the offset account (separate account). I never used the funds. I now have a new plan/purpose of the funds. As part of your guidance previously...... i repaid this $50k back into the home loan. I then applied for a brand new loan for $50k where the purpose of these funds is to purchase an inv property. The $50k is parked in an offset account attached to the new home loan....

havnet i here separated or apportioned the loan...

 

[Terry_w]

I think i have miswritten-

I have a $30k home loan. This portion is deductible. I borrowed $50k as a top up on this loan and the loan purposes was renos to my inv property. The $50k was kept in the offset account (separate account). I never used the funds. I now have a new plan/purpose of the funds. As part of your guidance previously...... i repaid this $50k back into the home loan. I then applied for a brand new loan for $50k where the purpose of these funds is to purchase an inv property. The $50k is parked in an offset account attached to the new home loan....

havnet i here separated or apportioned the loan...

You have 2 separate loans.
1. $30k which was used for purchase a house
2. a $50k loan which was borrowed to park in a savings account.

mixed purpose loan.

When you repaid the $50k it would come off both loans in proportion.
total loan 80k
30k loan = 30/80th
50k loan 50/80

So when you repay 50k it would be split
50k x 30/80 = decrease in the 30k loan
50k x 50/80 decrease in 50k loan.