How to spend a LOC... on IP expenses or on an investment (shares etc?)

[tess85]

Thanks to what I have learned on the good ship Somersoft... I have taken out my first loan split and LOC. I didn't realise it was so easy to access equity. Should really have done it earlier and purchased IPs with equity, but there you go, lesson learned.

I'm starting to understand how people can just keep buying IPs after IPs if they buy well under market value and revalue within 1 year or so to extract the original deposit out (and more, hopefully). And now I understand why people say do it early... because if the market has dropped a bit it might mean that you can't get at the equity that you originally had.

Nevertheless... now I have a loan split that is enough for a IP deposit and a $40k LOC that I was intending on putting IP expenses into (everything bar interest) in order to convert my non deductible debt into tax deductible debt. Edit: by paying IP expenses from the LOC instead of from offset savings where the offset account is against the PPOR loan. However, the current state of the sharemarket has got me thinking about drip feeding it into shares or managed funds over the long term. Just curious as to what people would do with a LOC in this climate...? The risk averse part of me would just spend the LOC on IP expenses, but I am curious to know how many investors on SS use their LOC for non property related reasons.

TL;DR: what would you do with a $40k LOC?

 

[Peter_Tersteeg]

Don't spend your LOC on non investment expenses. You're asking for trouble if you do.

I spoke to a someone last week who we set up LOC and other loans for a few years ago. Against my advice, he was adamant that he'd be able to get a private ruling on the way he was using his LOC (essentially working his finances to pay off his home loan faster). He'd engaged a very well known accountant (not anyone who reguarly contributes to this forum) to get the private ruling.

Essentially it didn't fly. The ATO ruled against it. Whilst I don't think there were penalties (because the submission was upfront), the finance structure is in a mess and there's a lot of paperwork involved to just claim the legitimate expenses.


On advice from your accountant, it's generally fine to use a LOC or otherwise borrow money to purchase shares and other investments. Just don't try mixing the use of funds with non-deductable purposes.

 

[Rixter]

On advice from your accountant, it's generally fine to use a LOC or otherwise borrow money to purchase shares and other investments. Just don't try mixing the use of funds with non-deductable purposes.

Correct....I have a few dedicated Investment LOC's and dedicated non-investment LOC for personal lifestyle expenses. Dont mix them.

 

[Rixter]

Nevertheless... now I have a loan split that is enough for a IP deposit and a $40k LOC that I was intending on putting IP expenses into (everything bar interest) in order to convert my non deductible debt into tax deductible debt.

Be very very careful here, because this is the reason the ATO looks at interest on interest deductions with a fine tooth comb. If your primary objective is to recycle debt the ATO will not like it. If audited you'll need to prove & show otherwise. I strongly suggest you seek the advice of a savvy accountant on how to properly structure your finances inline with ATO guidelines.

 

[tess85]

Correct....I have a few dedicated Investment LOC's and dedicated non-investment LOC for personal lifestyle expenses. Dont mix them.

I'm well aware of this but thanks for the reminder. I live off savings only, I prefer it that way... I think it is easier to be more disciplined with my spending! I will use the LOC for one thing only (ie. IP expenses or investment), just not sure what yet.

Be very very careful here, because this is the reason the ATO looks at interest on interest deductions with a fine tooth comb.

That's why I *don't* plan to capitalise interest or do anything relating to interest on interest. I just plan to use the LOC to pay strata fees, etc, instead of paying it from my offset account. Will run it by my accountant first, of course...

 

[Rixter]

Tess, what do you mean - I was intending on putting IP expenses into (everything bar interest) in order to convert my non deductible debt into tax deductible debt.??

To debt recycle (convert non deductible debt to deductible debt) one must capitalise interest on interest.

 

[tess85]

Hi Rixter

I must be using the wrong terminology... sorry I am still a newbie to all this. The way I think about it is this. At the moment all the strata fees, water bills, etc are paid from my savings which offset my PPOR loan. Consequently my savings are going down and my effective PPOR loan is going up every time I use savings to pay for IP expenses.

I now have a LOC against my PPOR loan to pay for these fees and bills instead. My savings will remain steady and the LOC balance will increase as I pay for these IP expenses from the LOC.

This is what I was trying to say by way of "converting" non deductible debt to tax deductible debt. Looks like I have got the terminology all wrong though... oops. I have corrected my original post to not be so misleading re: capitalisation of interest.

Thanks!
Tess

 

[Rixter]

No need to apologise Tess for learning What account is your rent and work income going into?

 

[BMan]

so my understanding Rixter is you pay for everything (investment wise) out of your loc even your (investment) loan interest but your rent gets put back into the loc and then capitalize the interest of the shortfall of the rent in the LOC...?

if the rent didnt get put back in, is that when it becomes an issue fot the ATO...?

could the rent be put into an offset account (against non deductible debt) and be transferred into loc either at end of each month or weekly etc..?

 

[Rixter]

so my understanding Rixter is you pay for everything (investment wise) out of your loc even your (investment) loan interest but your rent gets put back into the loc and then capitalize the interest of the shortfall of the rent in the LOC...?

Yes that is correct if there is a shortfall between incomes & expenses. If the income is greater than expenses then the LOC balance will be reducing.

if the rent didnt get put back in, is that when it becomes an issue fot the ATO...?

Yes, that is my understanding. By having rents going into the LOC you are providing evidence to the ATO that your intention is to repay loan and you are not debt recycling.

could the rent be put into an offset account (against non deductible debt) and be transferred into loc either at end of each month or weekly etc..?

What would this achieve?

 

[tess85]

To answer Rixter's qn, rent and work income would go into the offset account... is that ok or a no-no??

 

[Rixter]

To answer Rixter's qn, rent and work income would go into the offset account... is that ok or a no-no??

1/ How is IP loan interest being paid and from where?
2/ How is investment LOC interest being paid and from where?

 

[BMan]

could the rent be put into an offset account (against non deductible debt) and be transferred into loc either at end of each month or weekly etc..?

What would this achieve?

either the fact your holding the income in an offset against the PPOR for the month thus slowly helping pay it off sooner
or not actually putting all rent back in say $580 a week rent
putting $580 a week into offset then only put $500 back into LOC each week or 2K a month etc?

if that isnt allowable would it be if you were positively geared and instead of capitalizing interest on the shortfall you could have all money going into offset any extra that would be paying the LOC down not be put into the LOC each week?

 

[Rixter]

I guess the best way to go comes down to preference from your perspective. From an ATO perspective I strongly suggest you run it past your investment savvy accountant to make sure its ATO compliant.

 

[Peter_Tersteeg]

To answer Rixter's qn, rent and work income would go into the offset account... is that ok or a no-no??

It's very much a yes-yes to put your rental income into the offset account.

All income should go into your offset account. Rent money is income. Borrowed money is not income.

 

[tess85]

Thanks PTBear!

1/ How is IP loan interest being paid and from where?
2/ How is investment LOC interest being paid and from where?

Both IP loan interest and investment LOC interest would be paid from offset savings too.

 

[Rixter]

Thanks PTBear!





Both IP loan interest and investment LOC interest would be paid from offset savings too.

Go for it..that way you only have the LOC interest coming out of the offset instead of the all the expenses and therefore maximise the funds sitting in offset reducing your ppor non deductible interest payable each month.

 

[tess85]

Pretty much... thanks for confirming my thinking!

 

[lyndon01]

Hey,
(Long time listener, first time caller etc.)
Sorry to hijack, but I'm in a similar situation and just wanted to clarify.
It is ok to pay an IP's expenses (rates, body corp, land tax, pm fees, repairs, renos etc. but not interest) from LOC, even if the rent from the IP goes to an offset account against your PPOR loan?
Rent going back into the LOC is only necessary if you are going to pay the loan interest from the LOC (capitalising interest)?

My current situation, I have IP 1 and IP 2. IP 1 is positive with plenty of equity, some of which was used as deposit for IP 2. IP 2 is negative (basically no equity), and I intend to make it my PPOR in 2 years or so. IP 2 has an offset against the loan which all my income goes into (and expenses paid from). I plan to take a LOC against the remaining equity in IP 1 to pay for expenses (but not interest) on IP 1. IP 2 expenses would continue to come from the offset to avoid any contamination when it becomes my PPOR. IP 1 interest and LOC interest would also be paid from the offset. All income continues to go into offset against IP 2. Seem kosher? If it helps at all my strategy is not tax avoidance. IP 1 is currently security on the loan for IP 2, and I want to lower the LVR of the IP 2 loan so that I can remove IP 1 as security for the loan...
Cheers,