investment and personal in LOC :(

[Hados]

Hi Guys,

I took out a $25k Line of credit on my PPOR in June last year with the view to use the funds as deposits to purchase further properties... I did just that, purchasing two IP's in my home town and starting my 'empire'

Along the course of the year i used the LOC for repairs and maintenance and holding costs but being new to the game and naive on taxation etc, I used some of my funds for PERSONAL purposes I think I may have made a monumental mistake because now come tax time I have NO IDEA how to go about claiming the interest or dividing it up into 'investment' and 'personal'. I'm sure that the accountant will know what to do but I want to be able to make the most of the deductions, without ripping off the system.

How do I go about 'repaying' the personal use side of the LOC so that the interest is wholly tax deductible? Is it as simple as repaying into the LOC the amounts that I took out and clearing it up that way or am I stuck with my mistake? Can the LOC be split in two? I'm a little confused and annoyed that I made this stupid mistake!!!!

Also, Can the LMI that I paid on both investment loans be claimed in the first year or do I need to claim over a number of years?

Any advice would be appreciated

 

[bene313]

I believe you can split the LOC into sub-accounts to isolate the personal loan from the investment loan:

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001

Second Exception - Refinancing mixed purpose debt

18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.

The LMI is generally claimed over 5 years.

 

[Terryw]

Hi Guys,

I took out a $25k Line of credit on my PPOR in June last year with the view to use the funds as deposits to purchase further properties... I did just that, purchasing two IP's in my home town and starting my 'empire'

Along the course of the year i used the LOC for repairs and maintenance and holding costs but being new to the game and naive on taxation etc, I used some of my funds for PERSONAL purposes I think I may have made a monumental mistake because now come tax time I have NO IDEA how to go about claiming the interest or dividing it up into 'investment' and 'personal'. I'm sure that the accountant will know what to do but I want to be able to make the most of the deductions, without ripping off the system.

How do I go about 'repaying' the personal use side of the LOC so that the interest is wholly tax deductible? Is it as simple as repaying into the LOC the amounts that I took out and clearing it up that way or am I stuck with my mistake? Can the LOC be split in two? I'm a little confused and annoyed that I made this stupid mistake!!!!

Also, Can the LMI that I paid on both investment loans be claimed in the first year or do I need to claim over a number of years?

Any advice would be appreciated

You are pretty much stuck. Your loan is now partially investment and partially personal. I believe that any repayment you make will need to go in proportion to each of these. eg. if you had a $25,000 LOC and used $5,000 for personal stuff then 1/5th or 20% is personal. So if you repaid $100, $20 of this must be attributed to the personal portion. Because it is one big loan you cannot just attribute it to the investment portion.

Working out the interest will be a bit harder as you will need to take into consideration the time factor of different draw downs.

 

[Terryw]

see also
TR 2000/2. Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.
http://law.ato.gov.au/pdf/pbr/tr2000-002.pdf

 

[Terryw]

Just noticed that Bantacs has an 'apportionment calculator' for sale which may be useful.
"If you use a line of credit facility on a rental property loan AND you are drawing funds back out to pay private expenses... "

http://www.bantacs.com.au/property.php