How do I get the equity out of my investment properties to reduce non deductable debt

I have 3 properties, 2 investments and 1 PPR. Unfortunately my PPR has the highest non deductible debt. Both my investment properties are positively geared, with a combined equity of $140K. My accountant suggested I should use the equity from the IP to buy shares and increase non deductible debt. Hopefully as the shares increase in value, I sell them and place the profits my PPR (non deductible debt) Does anyone have any thoughts on this? What are other ways I can reduce my non deductible debt. I don’t really want to sell the properties. Thanks in advance,
 
Hopefully as the shares increase in value, I sell them and place the profits my PPR (non deductible debt) Does anyone have any thoughts on this?

Can be done - but the "hopefully" bit can come and bite you. Just make sure you are ok with having LESS than what you started off with - because it can (and has) happened (i.e. shares tank, you are still paying interest)

The Y-man
 
Thanks YMAN for the quick response. I totally agree with the word hopefully hence my post and wondering how other people may have gotten out of the same problem. Have they put there money in shares, term deposits, etc
 
Have done the shares/managed funds thing before.
Worked quite well - until a thing now known as the GFC mucked up things a bit... :p

Nothing changes your mind about not selling property than the prospect of a financial wipeout :D

In any case, if you do go down the route of shares and related products

1. study it as you would property investing
2. have a stratgey
3. Have a plan B (eg sell properties)

Cheers,

The Y-man
 
You could try debt recycling. Do a search on here, it is a is a similar to what your accountant proposed, but instead of selling shares to repay PPOR, you capitalise the IP costs and let the investment loans grow while making extra repayments on the PPOR debt
 
You could try debt recycling. Do a search on here, it is a is a similar to what your accountant proposed, but instead of selling shares to repay PPOR, you capitalise the IP costs and let the investment loans grow while making extra repayments on the PPOR debt

Basically you set-up a line of credit with that 140k. Then you use that line of credit to pay for ALL expenses on the investment properties (interest included).

This enables all your available income, including all rents to be used to pay off the PPOR loan.

The result is an increasing investment loan(s) and a decreasing PPOR loan.
 
Hi everyone,
I really appreciate everyone taking the time to post responses so far. Long time forum reader, first time forum poster!

TOBE - I have am in the process of researching debt recycling thanks for your tip.
BENE313 – I sort of follow what you’re saying. If I were to execute such a plan, I assume I would do it until PPR is paid off, or you reach the LOC limit?
This is going to sound silly and I may have try to over simplify the process, however is there a way I can grab the $140K, invest it in something, hide it from the ATO for a year, then put it on my PPR?
Cheers
 
Hi everyone,
I really appreciate everyone taking the time to post responses so far. Long time forum reader, first time forum poster!

TOBE - I have am in the process of researching debt recycling thanks for your tip.
BENE313 – I sort of follow what you’re saying. If I were to execute such a plan, I assume I would do it until PPR is paid off, or you reach the LOC limit?
This is going to sound silly and I may have try to over simplify the process, however is there a way I can grab the $140K, invest it in something, hide it from the ATO for a year, then put it on my PPR?
Cheers

A golden rule - the decision to invest in anything should not be fundamentaly driven by the tax benefits/consequences. The minute you use the funds for a non income producing purpose you lose the antecedent tax deductibility.

So yes, you will get a deduction on the interest on the equity redraw if you use it to buy shares but the minute you sell the shares and pay off your PPR you're gone.

I like BENE313's idea although you can't get quick access to the funds - it's a progressive thing.

Have you explored with a tax specialist the possibility of selling the IP to a family trust who can raise the finance in full then pay you so you can pay $140k off the PPR?
 
BENE313 – I sort of follow what you’re saying. If I were to execute such a plan, I assume I would do it until PPR is paid off, or you reach the LOC limit?

Yes, which ever comes first.

Read this:

http://www.somersoft.com/forums/showthread.php?t=26532

This is going to sound silly and I may have try to over simplify the process, however is there a way I can grab the $140K, invest it in something, hide it from the ATO for a year, then put it on my PPR?

No. Not legally anyway.
 
Have you explored with a tax specialist the possibility of selling the IP to a family trust who can raise the finance in full then pay you so you can pay $140k off the PPR?

A good idea, but only if necessary. The costs of doing this are CGT on the gain plus stamp duty.
 
I felt a bit silly asking these questions, but by the amount of visits this topic received in ½ a day, it wasn’t that silly after all!

So essentially equity gained from IP’s can be uses as a vehicle to potentially leverage myself into more deductable debt, and the gains made will be capitalised when I sell the investments; ie IP or shares, ‘assuming’ both asset classes go up in value and I can receive over a 7% in shares...... or;

I use BENE313 method. Thanks for the link too BENE31. I was actually reading that link earlier. I may need a bit of time to digest it.

No I haven’t explored the IP to family trust method yet. I will do so shortly.
Once again thanks in advance.
 
My PPR was suppose to be an investment which we ended up moving into. Moving in the other IP is not an option. Thanks anyway.
 
If you are going to capitalise your interest to pay down personal debt, it would be wise (mandatory I think) to get a private ruling from the ATO prior to starting this.
 
My accountant suggested I should use the equity from the IP to buy shares and increase non deductible debt.

I think you mean to increase deductible debt.

Hopefully as the shares increase in value, I sell them and place the profits my PPR (non deductible debt) Does anyone have any thoughts on this?

I invested in blue chips 4 years ago and they are worth 60% of what I paid for them. As mentioned above the, the GFR, aka the beginning of the Great Recession has made share investing more risky and more downward trending. Of course, you may be different and make a bundle, but you could also lose money on that strategy as well.

I was originally unsure of Corsa's thread on compound interest claim until TD 2008/27 settling once and for all that compound interest is ok to claim on.

Other ideas
Selling to spouse
http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID200179'&PiT=99991231235958
If you want to sell to other entities, you may want to speak to your accountant about Part IVA applying and a cost / benefit analysis of whether the capital gains and stamp duty costs are worth the tax savings.
 
Also look at the interview with Keithj. Great ideas there.

eg. You could set up a LOC and borrow to buy some shares. Get a low margin loan on these shares and let the interest capitalise on this and the LOC. Pour all dividends into the PPOR loan.
But beware of the dangers!!!!
 
Hi guys, Im back after doing a bit of research last night.
I found this post really helpful as it just simplified everything for me. Thanks everyone for their contributions too.
http://www.somersoft.com/forums/showthread.php?t=56848&page=2
Bene313 - totally understand your strategy. However, if I use the $140K equity made from both IP when I set up the LOC, then it would just take me longer to save for a deposit for another property, or would I be using the equity against my PPOR?
I understand that the IP, PPR will increase in value over time, along with the LOC etc, etc, but will it slow down my ability to potentially buy again?
Cheers
 
if I use the $140K equity made from both IP when I set up the LOC, then it would just take me longer to save for a deposit for another property, or would I be using the equity against my PPOR?

Although you are using up your 140k equity in your IPs, you are also increasing the available equity in your PPOR.

If you wanted to make another IP purchase, you would refinance your PPOR drawing down available equity to fund the IP deposit. The draw down is deductible as it is used as a deposit on the IP.

Please make sure you go over all this with your accountant.
 
Top