Interest on Interest

W

wade75

I have read corsa's post and it was Fantastic!!!! Still not sure on one area.

Is it acceptable to borrow an extra 30,000 on my investment loan for the purpose of paying interest on the investment loan over the next few years.

If i understand correctly this is fine as long as the extra money borrowed is only used for investment purposes.

This then enables me to put all my earnings including rental income into my PPOR to reduce this loan as quickly as possible.
 
wade75 said:
I have read corsa's post and it was Fantastic!!!! Still not sure on one area.

Is it acceptable to borrow an extra 30,000 on my investment loan for the purpose of paying interest on the investment loan over the next few years.

If I understand correctly this is fine as long as the extra money borrowed is only used for investment purposes.

This then enables me to put all my earnings including rental income into my PPOR to reduce this loan as quickly as possible.
Click to expand...

I borrow the extra and leave the amount in an offset account set against the IP (have no PPOR to offset it against).

My reading of Corsa's thread is that you do not pay down your PPOR loan with the rental income(frowned on by the tax office) but leave the rent in an account offset against your PPOR.

Any one please feel free to correct me.

Peter
 
turk said:
I borrow the extra and leave the amount in an offset account set against the IP (have no PPOR to offset it against).

My reading of Corsa's thread is that you do not pay down your PPOR loan with the rental income(frowned on by the tax office) but leave the rent in an account offset against your PPOR.

Any one please feel free to correct me.

Peter
Click to expand...

You should probably read some of the threads on debt recycling.

People recycle their non deductible debt with rental income / dividends all the time, provided you structure it correctly
 
bort said:
You should probably read some of the threads on debt recycling.

People recycle their non deductible debt with rental income / dividends all the time, provided you structure it correctly
Click to expand...

Bort

In my case as I stated I have no non deductible debt to recycle rental income against.

Wade 75 was looking to pay his rental income into his PPOR loan which according to Corsa may not be an acceptable way to the tax office to recycle debt, where as parking it in an offset account would be acceptable as it could then be considered available for futher investments.

Have not been able to find any threads that support paying down PPOR loan
with rental income whilst capitalising interest on rental loans.

Regards

Peter
 
ffc1883_1996 said:
That's exactly what Corsa does reccomend!
Click to expand...



2. channel all rental income into the Rental Income A/C
3. link the Rental Income A/C as an offset to your PPOR loan (if you still have one) or link it to another loan

Just trying to be helpful, suggest you read Corsa's thread again,with particular attention to why you do not pay down the PPOR loan with rental income:)

Regards Peter
 
Hi turk,

I've read your comments above and Corsa's entire thread - now I am confused!

Corsa's recommendation that all rental income be directed into an account which is used to offset a PPOR loan. This account need not be separate from your normal account for wages, etc.

Is that any different to directing all rental income into a PPOR loan account with a redraw facility?

Regards - Ben
 
ffc1883_1996 said:
Hi turk,

I've read your comments above and Corsa's entire thread - now I am confused!

Corsa's recommendation that all rental income be directed into an account which is used to offset a PPOR loan. This account need not be separate from your normal account for wages, etc.

Is that any different to directing all rental income into a PPOR loan account with a redraw facility?

Regards - Ben
Click to expand...

Hi Ben

There is a difference as I understand it.

By directing your rent into your PPOR loan acc. and capitalising interest this becomes a tax avoidance scheme.

However by directing the rent to an offset acc. you can claim that you are keeping it there for future investment oppurtunities. I.E. not tax avoidance

This is my take on Corsa's thread however someone may have a different opinion, please feel free to correct me.

Regards

Peter
 
turk said:
Hi Ben

There is a difference as I understand it.

By directing your rent into your PPOR loan acc. and capitalising interest this becomes a tax avoidance scheme.

However by directing the rent to an offset acc. you can claim that you are keeping it there for future investment oppurtunities. I.E. not tax avoidance

This is my take on Corsa's thread however someone may have a different opinion, please feel free to correct me.

Regards

Peter
Click to expand...

I would be very interested to see a tax ruling that sais this. 'keeping it there for future investment oppurtunities' sounds very open ended
 
turk said:
Bort

In my case as I stated I have no non deductible debt to recycle rental income against.

Wade 75 was looking to pay his rental income into his PPOR loan which according to Corsa may not be an acceptable way to the tax office to recycle debt, where as parking it in an offset account would be acceptable as it could then be considered available for futher investments.

Have not been able to find any threads that support paying down PPOR loan
with rental income whilst capitalising interest on rental loans.

Regards

Peter
Click to expand...

i think this is the latest thread on recycling (although i think they talk about shares rather than property, but the same principal probably applies .. unless you have a split loan situation like hart's case).

http://www.somersoft.com/forums/showthread.php?t=36263&highlight=debt+recycling

but as far as I know, rental income is your money - like a salary ... you can do whatever you want with it ... pay it off your property related loan, blow it on a nice car, pay down your PPOR loan, buy a new star wars collection off ebay, or whatever you like ...
 
I spoke to the taxation department today and they told me that the rental income is mine to do whatever i like with.
The borrowing extra money on the investment loan is a little more difficult and someone is going to call me back in the next 24 hours to advise me on that. So I'll just wait and see.

My accountant has told me it is ok. I have read in some books it is ok and then other articles state that it is not allowed.

My understanding is that it can be done BUT the interest on the refinanced amount can not be claimed as a tax deduction?????

Have to wait and see...
 
wade75 said:
My understanding is that it can be done BUT the interest on the refinanced amount can not be claimed as a tax deduction?????

QUOTE]

Then theres not much point in re-cycling the debt is there? All we're doing here is reducing the bad debt interest rate by the tax benefit from your highest marginal tax rate. Eg. interest rate of 8%, on 46.5% MTR = 4.28%, on 41.5% = 4.68% and on 31.5% = 5.48%.

With the govt now proposing to increase thresholds and reduce tax rates, makes all negative gearing and depreciation benefits very unattractive. I think I will vote Labor. Bring back the old tax rates I say!
Click to expand...
 
I'm doing exactly this.

I am paying two IP loans and all expenses from a line of credit. Interest on the line of credit is capitalised

All income including rent is directed into an offset account against our PPOR. PPOR interest payments come out of the offset account.

I suspect the PPOR loan will be totally offset in 12 months, after which we will start directing any spare $$ into the line of credit.
 
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