Investment Loan from equity and its tax deductibility status

[LukeQLD]

I am sure my scenario is a common one, but I'd like some second opinions as I'm not sure what my accountant is telling me, is correct.

I have a PPOR with $150k owing.
I have accessed my equity in this property, so I now have a new Investment (Interest Only) Loan worth $210k.

According to my bank I will get credited the $210k amount, which will go into a clean savings account, no mixed personal funding. Then I need to transfer all but $1000 back into the Investment Loan. I will do this because a) I have not yet found a property to purchase and b) I don't want to pay interest until I actually use the money.

When I find a property I will draw down on this loan the amount needed for a deposit, stamp duty, legal fees etc.
The remainder of the new IP costs will come from a separate non-cross collateralised loan, potentially with another lender.

Does this all seem okay in regards to tax deductibility? Will the portion of the 210k investment loan that has been used for deposit be tax deductible.

Eventually I will also look to use that same investment loan as deposits for further properties in the future. Will these also be tax deductible?

Will any drawn funds I use from this loan for IP purposes such as rates, insurance etc also be tax deductible?

 

[Rixter]

Sounds like an investment loan with offset savings account attached. If so, no need to stick it back into the loan as the interest being earned whilst sitting in the savings account will offset the interest having to be paid against the loan.

I personally would have just set up a LOC for investment secured against the PPOR. Keeps it simple.

 

[LukeQLD]

LOC not currently offered at my bank :/

 

[Rolf Latham]

Us mugs without the Tax Agen Shingle would say yes, no probs as long as the account the funds are drawn into is free of tax paid funds such as savings / wages etc.

If you seek specific tax advice you will get 3 replys

yes
no
maybe - get a PBR

ta

rolf

 

[Aaron_C]

In other words do whatever and pray for the best

 

[Rixter]

LOC not currently offered at my bank :/

I take it you deal direct through 1 bank and not a mortgage broker then?

 

[LukeQLD]

I take it you deal direct through 1 bank and not a mortgage broker then?

Yeah, for now. Is that a problem?

 

[Rixter]

Yeah, for now. Is that a problem?

Yes it certainly can be. A IP savvy mortgage broker has access to lots of various banks & non bank lenders products & services.. They can advise you on the lender who has the best products tailored to your personal situation, goals & time frames.

Dealing with the one bank they can only sell you their products/service which may or may not best suited to you.

Being exposed to the one bank once they say no more funds your portfolio building comes to a rapid halt.

 

[Terry_w]

I am sure my scenario is a common one, but I'd like some second opinions as I'm not sure what my accountant is telling me, is correct.

I have a PPOR with $150k owing.
I have accessed my equity in this property, so I now have a new Investment (Interest Only) Loan worth $210k.

According to my bank I will get credited the $210k amount, which will go into a clean savings account, no mixed personal funding. Then I need to transfer all but $1000 back into the Investment Loan. I will do this because a) I have not yet found a property to purchase and b) I don't want to pay interest until I actually use the money.

When I find a property I will draw down on this loan the amount needed for a deposit, stamp duty, legal fees etc.
The remainder of the new IP costs will come from a separate non-cross collateralised loan, potentially with another lender.

Does this all seem okay in regards to tax deductibility? Will the portion of the 210k investment loan that has been used for deposit be tax deductible.

Eventually I will also look to use that same investment loan as deposits for further properties in the future. Will these also be tax deductible?

Will any drawn funds I use from this loan for IP purposes such as rates, insurance etc also be tax deductible?

Once you pay the money back into the loan there shouldn't be any tax issues. Redrawing the money again will be treated as a new loan for tax purposes so deductibility will depend on how this money is used and what for.

Why are you keeping $1000 out? This could cause the loan to be a mixed purpose - but it would be a very low %.

Also how do you get the money from the loan account to where it has to go? Direct debit from that account via internet banking or a cheque book would be a good way to do it, but pulling it out and into a savings account temporarily won't be a good idea.

 

[LukeQLD]

Once you pay the money back into the loan there shouldn't be any tax issues. Redrawing the money again will be treated as a new loan for tax purposes so deductibility will depend on how this money is used and what for.

Thank you That's what I wanted to hear.

Why are you keeping $1000 out? This could cause the loan to be a mixed purpose - but it would be a very low %.

For some reason if I pay it all back into the loan, they (my bank) say that it will automatically close the loan. I was thinking that to keep it all investment related, I could just buy some shares with it straight away.

Also how do you get the money from the loan account to where it has to go? Direct debit from that account via internet banking or a cheque book would be a good way to do it, but pulling it out and into a savings account temporarily won't be a good idea.

Good question, something I am still thinking through. If I can direct debit I will definitely do that.
I have never actually used a cheque book... showing my age here I think.

Basically, avoiding a transition into a savings account should be the first priority.
But is this still the same even if it's empty of all funds?

The $1000 I have to keep out (mentioned above), will have gone into this empty savings account...

 

[LukeQLD]

Yes it certainly can be.

Well to explain, basically I am very happy to stay with my current bank for any loans tied back to my PPOR, even though it seems they don't have the full flexibility of others.

I am thinking that when I go to purchase (80%-90% LVR loan), I would look at other banks thus ensuring there is no chance of cross-collateralisation.

And I'll probably approach a broker as this stuff is really giving me a headache.

 

[Rixter]

And I'll probably approach a broker as this stuff is really giving me a headache.

I strongly suggest you do otherwise at a later date you may find yourself painted into a corner.