Heres a ? for you

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From: Melissa D


Hello all! We went to our bank to look at figures. They told us to keep pouring the money into the loan. (see beginner and beginner again). They then told us when we want to upgrade to a bigger house, as we planned either late this year or early next year, to then take this loan back up to its full amount to buy our next house and use a small portion for another IP as well.

This house we are in now would be cash positive (is that what you call it?)or have a surplus but I am confused as to the tax implications for using most of the money for a new PPOR and then a portion for another IP as well as keeping this original PPOR and turning it into a rental.

Should we just wipe the slate clean with this one or is there a better way to do this than the way the bank has told us. The bank manager has confused us with his 'supposed' brilliance. We would have the loan down to approx $35,000 and the house would be worth maybe $80,000 - %85,000 (we orig borrowed 70,000.

We are still to find a good IP accountant as yet.

Please clear the mist. Thanks again Mel D
 
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Reply: 1
From: Manny B


Hi Melissa,

what I would do is get the bank to create an offset account linked to your loan & poor any excess money in there (till you are ready to move on). That way when you take out the money from your offset account to buy a new PPOR, you can claim the entire IP loan outstanding from your original home on tax. If you do as your bank manager sais & you re-draw back into your loan, then the amount re-drawn will not be tax deductible from your IP (as the money was used for your new PPOR)...

Cheers,

Manny.
 
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Reply: 2
From: Rolf Latham


Hi Melissa

I would be thinking really really hard about getting some other opinions on what you can and cant afford to do. This place here will help to some extent, but please go and speak to another lender and/or independent mortgage broker.

I have clients whose financial progress could be much better if they had sought further opinions.

Ta

Rolf
 
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Reply: 2.1
From: Gail H


Manny,

Isn't the test for tax deductibility the purpose for which the funds are withdrawn/borrowed? I don't understand why the tax office would distinguish on the basis of using offset account rather than LOC. Is this because you would argue that the money in the offset account which is used for the new property was never actually paid into the first loan? I must admit, I still don't get why offset accounts are meant to be better in some circumstances than LOCs.

I know this has come up before. This example may be a good way of highlighting and clarifying the differences. Can anyone help? Dale?

Gail
 
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Reply: 2.1.1
From: Duncan M



OK, here's an example:

1. You have an IP for which you have a debt of $100,000
2. Your Great Aunt Maud dies, leaving you $20,000
3. You need somewhere to park this money before buying a new car.
4. You deposit it into your IP loan to save a little bit of interest for a
few weeks.
5. You find the new car you want and redraw the $20,000 and buy the car.

Guess what? You now have a $100,000 IP loan. But only $80,000 generates
interest which is deductible. Before Aunt Maud died, you had a $100,000 loan
and all of the interest was deductible.

Contrast the above to an Offset Account:


1. You have an IP for which you have a debt of $100,000 and an offset
account.
2. Your Great Aunt Maud dies, leaving you $20,000
3. You need somewhere to park this money before buying a new car.
4. You deposit it into your offset account to save a little bit of interest
for a few weeks.
5. You find the new car you want and redraw the $20,000 from your offset
account and buy the car.


Guess what? You now have a $100,000 IP Loan, and ALL of the interest is
deductible.


Does this help?

Duncan.
 
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Reply: 2.1.1.1
From: Rolf Latham


HIya

The tax logic (heheheh not such thing) behind Dunc's argument (which has always been mine) is that the parking of the 20 k INSIDE the loan represents a principal reduction.

The effect of this is most felt where you have paid off your PPOR entirely and you upgrade and retain the old PPOR as an IP. ALl the debt you thus incur will be used to purchase the PPOR and is such for non income producing purposes.

So........... my argument always has been plan for the future. Be very careful as to the wording of many lenders advertising 100 % mortgage offset with free redraw. Ensure that you use an account external to the loan to park your cash. While technically 100 % mortgage offset for a redraw or LOC loan is correct per say, they are not OFFSET accts, Many lenders advertising in this way do not have the true offset product in their offering.

Ta

Rolf
 
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Sim

Administrator
Reply: 2.1.1.2
From: Sim' Hampel


Well explained Dunc, couldn't have done it better myself ;-)

 
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Reply: 2.1.1.2.1
From: Duncan M




> Well explained Dunc, couldn't have done it better myself ;-)

Thanks, Sim

But it should be added that anyone stupid enough to spend $20,000 on a car
wouldnt be using this strategy in the first place :) Did I mention the 3
greatest financial mistakes I've ever made all had the word "Commodore" in
them? :)

Duncan.
 
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Reply: 2.1.1.2.1.1
From: Manny B


Hi Melissa,

sorry I didn't get to reply to your question earlier, but seeing that Duncan has given a GREAT example, there is no need for me to get into this...

I must say that I've also made silly mistakes such as these, as I was relying on a bank manager that couldn't tell difference between an IP home loan versus an PPOR loan, therefore I've done the mistake of parking $$$ into an IP loan then losing out big time... I now swear by my offset account ;) which gives me great flexibility (ie. great to tap into in case of an emergency)...

As stated by Rolf, you may need to deal with someone that understands what you are trying to achieve (ie. Rolf)...

Cheers,

Manny.
 
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offsets against LOCs

Reply: 2.1.1.2.1.1.1
From: Waverly Bay


Hi

Well said Duncs and Rolf - offsets are indeed a great tool. Does any one know which banks (if any) offer offsets against LOCs? Not all banks offer offsets for interest only loans...so i would imagine offsets for LOCs would be rarer?

cheers

Waverly
 
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offsets against LOCs

Reply: 2.1.1.2.1.1.1.1
From: Manny B


Hi Waverly,

I've got my offset account setup on my IP loan with Commbank, but from what I've seen ANZ & NAB should also offer it (with IO)...

Cheers,

Manny.
 
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offsets against LOCs

Reply: 2.1.1.2.1.1.1.1.1
From: Gail H


Thanks everyone. Finally I understand.



Gail
 
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