How to Redraw "parked" funds in Investment Property Loan

[Fee]

Hi I am new to this forum and this is my first post so I hope I have sent this question to the right place.

How do you redraw "parked" funds in an investment property loan so the loan is still tax deductible?

Background:

We currently have 2 loans
1) Investment Property loan - interest only with redraw
2) home loan - with offset facility

We have been happily running these 2 loans for 10 years with the Investment Property loan as fully tax deductible and the home offset loan as non tax deductible with all income, rent etc going in here. This has worked very well for us and as a consequence we are now ready to close down our home loan offset account. In addition, we recently received a gift of some money that we have earmarked for renovating our home. However as our offset account was at zero we made the mistake of temporarily "parking" this money in the Investment Property loan as we had nowhere else for it to go only to find out afterwards that the ATO now considers the Investment Property loan as paid off and if we redraw on this we can no longer claim the interest as tax deductible on the Investment Property loan.

Questions:

We want to redraw the money out of the Investment Property loan and still fully tax deduct the loan as we always have. I have heard we can do this as long as we spend the money we redraw on another investment. Is this the case? What sort of investments? Could renovations be considered an investment, term deposits? Another investment property? Problem is if we bought another investment property with the money we would then not have the money for renovations! Suggestions have been made regarding selling my half to my partner and re-mortgaging the investment property which would be great because it would give us more money for renovations but then we are stuck with capital gains tax on my half of the property. We really do not want to sell if we can avoid it but we really want a tax deductible Investment Property loan!

thanks in anticipation Fee

 

[Rob G.]

Renovating the IP should be OK - an income producing purpose.

Vacating and renovating the PPOR with the intention of immediately renting it out as an IP should also be OK - you just need to find another place to live !

Sticking the money in a term deposit is going backwards, you pay more in interest than you earn.

Cheers,

Rob

 

[Perp]

Fee, that's a really tough lesson to learn! I don't believe there's any way to "undo" what you've done, unfortunately.

One option may be to sell the IP into a structure (eg Trust) at a price that results in low or zero capital gain. If you're the sole beneficiary of the Trust, this may even be able to be done without attracting stamp duty, due to no change in beneficial ownership. If the property is negative geared, though, this would mean that unless you're willing to go down the hybrid trust route (and I'm really unsure whether I would be), then you'll lose the ability to offset losses against your personal income. But if you have other profits that you could distribute to that Trust, it may be a viable option.

I'd be talking to an accountant who specialises in this kind of issue.

 

[Rob G.]

However as our offset account was at zero we made the mistake of temporarily "parking" this money in the Investment Property loan as we had nowhere else for it to go only to find out afterwards that the ATO now considers the Investment Property loan as paid off

Fully paid off - or partially paid down ?

and if we redraw on this we can no longer claim the interest as tax deductible on the Investment Property loan.

If only partly paid down, refinance into 2 separate loans exactly equal to the percantage investment/private.

Cheers,

Rob

 

[bennido]

Fee, that's a really tough lesson to learn! I don't believe there's any way to "undo" what you've done, unfortunately.

Can he undo the problem by refinancing the loan to the value of the IP and moving the extra finds into an attached offset account ?

 

[Perp]

Can he undo the problem by refinancing the loan to the value of the IP and moving the extra finds into an attached offset account ?

No, unfortunately.

Let's put some figures to it. Let's say both the PPR and the IP are worth $500K, and both had loans of $400K against them, one (the IP) being tax-deductible. Let's say that Fee accidentally deposited a $300K windfall into the IP loan account, reducing the balance to $100K.

It is true that if you redraw the $300K and use it for investment purposes, then yes, the $400K becomes deductible again. You end up where you started - with $400K of deductible and $400K of non-deductible debt. But if you'd paid the $300K into the PPR loan instead, then redrawn it from there for investment purposes, you'd now have $700K of deductible and $100K of non-deductible debt.

In other words, whatever you do now, unless you change ownership of the IP, you've lost the ability to claim interest on $300K of debt.

Yet another reason to campaign to overhaul tax laws as follows: investors should be able to claim interest on loans up to the full purchase price of their investments. If you have investments whose purchase prices total $1M, you should be able to claim interest on $1M of debt, regardless of security and how you've juggled funds between accounts, and whether you used your own money and redrew it, etc. Much simpler and fairer!

 

[Howdy Doody]

Hi guys,

I'm interested to know if Fee had an offset account associated with the IP loan would he be able to temporarily park those funds and withdraw at a later time without losing the tax deductability of the IP loan?

 

[Perp]

I'm interested to know if Fee had an offset account associated with the IP loan would he be able to temporarily park those funds and withdraw at a later time without losing the tax deductability of the IP loan?

Yes, if that had been done it would have been fine. You can put money in and out of any offset account without affecting tax deductibility of the associated loan account.

But once you've reduced the debt - eg paid down a loan account, or reduced the balance of a LOC - you've lost the tax-deductibility.

 

[Howdy Doody]

Yes, if that had been done it would have been fine. You can put money in and out of any offset account without affecting tax deductibility of the associated loan account.

But once you've reduced the debt - eg paid down a loan account, or reduced the balance of a LOC - you've lost the tax-deductibility.

Thanks Tracey. That's good news for me but bad news for Fee

 

[bennido]

Thanks Tracey. That's good news for me but bad news for Fee

Yeah .. offset accounts are relative new thing .. when i bought my 1st ppty in the late 90s none of the major banks were offering it ..

 

[Pete]

Yeah .. offset accounts are relative new thing .. when i bought my 1st ppty in the late 90s none of the major banks were offering it ..

When I bought my first property (an IP) in December 1987 I had a 100% offset account. It was as good as could be in that it was usable like a normal savings account - could put any amount in any time, or redraw any amount too (within the loan limit). All my spare money went into there and then I redrew some a few years later to fund overseas travel.

House in Cairns - I was in that lovely tropical city at the time. Loan with Northern Permanent Building Society.

The deposit came from selling all my shares, three weeks before the stockmarket crash in Oct '87.

BTW, the loan was variable and in the next year or two I saw interest rates climb from 13% to 19%, IIRC. But with a $60,000 loan - $73,000 house - it wasn't a problem: rent was $160/week. And the house was not very old so I had the 4% building depreciation. Same tenants for 10 years: rent unchanged... I sold when I was working overseas in 1998: I knew virtually nothing about property investing. It wasn't until Dec 2000 that I bought property again, my first PPOR. And then in 2001 I read a Jan Somers' book and learnt about property investing. Bought some houses in 2001 and have been doing well since then.

Cheers,