How to separate mixed loan (deductable & non deductable)

When an IP loan has been topped up, and the extra cash used for personal purposes, obviously, only part of the loans interest is then considered to be deductable. The general treatment by accountants is to calculate the non deductable percentage of the loan, and claim only the deductable percentage of the interest. This will continue for the life of the loan!

This is a bit of a headache for the accountant, but not that big a deal for the borrower, right? But what should you do when you want to make extra repayments on the loan? Obviously you would want these extra repayments to apply to the non deductable part of the loan. If the loans were separate this would be easy.

Is there an easy way to separate the debts?
Should you maybe refinance by creating one loan for the deductable debt, and maybe a LOC or similar for the non deductable component?
This would allow you to pay off the non deductable LOC ASAP, whilst making minimum (IO) repayments on the deductable loan.

I know a good broker would get this right in the first place, but if you got it wrong, could a decent broker sort out this mess for you?

Thanks in advance for the help
 
Its an interest only loan.
Sorry to ask another question, but, what difference would this make if it were P&I, IO or LOC?

Thanks
 
PHF

Ask the bank to split the loan and set up 2 different accounts. Alternatively if they say no set up a new account for the deductability amount and transfer the funds. Speak to your decent broker or any number of the great ones on this site and they will fix it for you

Jezza
 
Hiya PH

As an IO loan, apportioning the interest is something my 10 year old can do with his excel skills.

AS an IO loan there wont have been any (?) repayments of principal which would need to be apportioned,

All looks simple then to split the loan into the 2 bits and hoe into the non ded side

ta
rolf
 
Split ASAP.

There was a land mark case a couple of years ago in the supreme court homeowner vs ATO. A women had an investment loan and had a few transactions on it at the supermarket with a linked card. The ATO decided to inform her the loan was no longer an investment loan. She of course took exception and lost and kept on loosing and paid the ATO's costs as well.

Never mix personnel with investment, no matter how easy it is to calculate. Its all fine until you get audited and then its very costly !

I find bank sourced dept all the time in this scenario. When my clients query their accountant they have a fit.
 
and herein lies the problem with LOE. the loans cannot be separated. any repayments need to be apportioned across the ded and nonded components - with interwst allocated to the current balance of each. if you never sell, you will need to keep these records forever.

easier to never mix, particularly after reading the post above
 
I have a loan that will be mixed as soon as it stops being a PPoR - part of the loan 'should' be attached to land we are building on, and we will probably need to top it up more to make the deposit on the new PPoR.

I guess we can just ask the bank nicely to split the loan (with the same security) when we move out of the house if it becomes an IP?
 
I have a loan that will be mixed as soon as it stops being a PPoR - part of the loan 'should' be attached to land we are building on, and we will probably need to top it up more to make the deposit on the new PPoR.

I guess we can just ask the bank nicely to split the loan (with the same security) when we move out of the house if it becomes an IP?

You should talk to your accountant on that one, as there are all sorts of rulings when PPoR becomes IP. For example if you raise money from an Investment property that was PPoR for a new PPoR, I think you will find its not tax deductable, because the money raised is NOT for income producing purposes. But again I stress this was advice from a year ago and only an accountant can give up to date ATO policy ( or ring the ATO )
 
I think you will find its not tax deductable, because the money raised is NOT for income producing purposes.

That's what I was figuring ... the $30k from the original loan that really belongs to the land subdivision and any topup we get is *not* deductable but the paltry figure we actually paid for the house and renovations on that house would be deductable.

Which will leave us in the very much not ideal situation of having $55k deductable on a $180-200k house, and anything up to $130k for the new PPoR (worth $250-300k) but secured by two separate houses with a decent slab of that in the loan of the old house.

Yet another reason I'm hoping our previous PPoR (also an IP) sells, so I can pay out the $30k land component and the remainder of our 40% deposit in cash without having to screw around with equity in multiple properties.

This is all complicated by the fact I can't get a construction loan and doing weird equity Stuff was advised by the broker we spoke to, so we can make progress payments from equity in our existing properties, not secured against the new property the money will actually be paying for. Only the final progress payment will actually be secured by the new house.
 
and herein lies the problem with LOE. the loans cannot be separated.

Why cant they be separated? :confused:

Whilst in the property acquisition phase and one's still subject to payg installments I can see the need.

On another note, a change of paradigm - if one is already living on equity, are they paying tax in the first instance? Which begs the next question, if one's not paying tax why the need to separate at all?

If one's portfolio is appreciating faster than they are drawing upon it (without the need to increase cash flow from tax deductions) to fund their lifestyle haven't they reached investment nirvana?

Some times people, from focusing too much on what's deductible and what's not, that they can lose sight of the forest for the trees.

;)
 
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