Is changing non deductible debt to deductible debt possible?

[Noodle]

Hi All,

On a quest for knowledge at the moment so apologies if this is a silly question but cant seem to find the answer.

If I increase my home loan by refinancing some equity out and then use the funds for personal things like car, holiday etc i.e. non deductible debt. If the property then at a later date was changed into an investment property, would the whole non-deducitble loan now become tax deductible as it is secured against an investment?

Seems like a potential way of getting lower interest rates than a personal loan is all whilst also making tax deductible at a later date.

If it is possible has anyone done this? If its not possible how would the ATO ever know?

Hope this makes sense and please excuse my weird wording. Nt trying to tax dodge, just to know my rights

 

[D.T.]

The purpose of the funds determines whether it's deductible or not.

Its irrelevant whether it's an IP or PPOR that is the source of the funds or security for the funds.

 

[Noodle]

But this is where I get confused as surely the purpose of funds is susceptible to change?

I.e. If I buy a home to live in, the purpose of funds is for personal use and the interest is not tax deductible. If however I move out and turn the property into an investment property then all of a sudden the purpose of the funds changes to be for investment purposes and becomes tax deductible.

How would the ATO know if you were using the funds from the equity release for further investment or for personal use?

 

[Ed Barton]

How would the ATO know if you were using the funds from the equity release for further investment or for personal use?

when you get audited. please keep us up to date about how long you get away with it.

 

[travelbug]

If it is possible has anyone done this? If its not possible how would the ATO ever know?

How would the ATO know if you were using the funds from the equity release for further investment or for personal use?

Nt trying to tax dodge, just to know my rights

Really? For someone not trying to tax dodge you ask a lot of questions about how they would find out if you did something illegal. For one you need to list what the investment is so you can claim against it.

But this is where I get confused as surely the purpose of funds is susceptible to change?

I.e. If I buy a home to live in, the purpose of funds is for personal use and the interest is not tax deductible. If however I move out and turn the property into an investment property then all of a sudden the purpose of the funds changes to be for investment purposes and becomes tax deductible.

Yes the house you bought was not an investment but now it is so NOW it IS deductible.
If you can find a way for your car or your holiday to become an investment AFTER the fact go for it.

Sure you can lie and try to defraud the govt. But it is what it is.

 

[Terry_w]

Its the purpose they funds were used for that determines deductibility. The purpose of the borrowings isn't 'private' or 'investment' but what the funds were used to buy. This doesn't change.

So if you borrow $100,000 to buy a house to live in the purpose is buying the house. If you later move out the loan is still attributed to the buying of the house so if you rent this house and it is producing income the interest on the loan used to buy this income producing asset is deductible.

However, if you were to increase this loan by $10,000 to buy a car for personal use and then you later move out of the house you will still only be able to claim the interest on $100,000 and not $110,000.

Incidentally, if you did just have one big loan of $110,000 then you could only claim 100/111th of the interest and you could not deposit $10,000 in to reduce or eliminate the private loan as this deposit would come off both portions of the loan.

People get into trouble, especially with LOCs where they put all salary in and then withdraw for expenses. If you do this on a house that you live in it is fine, but if you were to move out later and rent this house then you may have a huge loan still, but none of the borrowings may be deductible.

 

[Sunfish]

I got away with something like this in the '80s. Raised an LOC and used some to pay off the house and the rest to pay off business leases and some capital. Never did "assign" any of the loan for private use.

Wouldn't dream of trying it today though.

Note: This is now well outside the statute of limitations so I will mention it [quietly].

 

[Noodle]

Its the purpose they funds were used for that determines deductibility. The purpose of the borrowings isn't 'private' or 'investment' but what the funds were used to buy. This doesn't change.

So if you borrow $100,000 to buy a house to live in the purpose is buying the house. If you later move out the loan is still attributed to the buying of the house so if you rent this house and it is producing income the interest on the loan used to buy this income producing asset is deductible.

However, if you were to increase this loan by $10,000 to buy a car for personal use and then you later move out of the house you will still only be able to claim the interest on $100,000 and not $110,000.

Incidentally, if you did just have one big loan of $110,000 then you could only claim 100/111th of the interest and you could not deposit $10,000 in to reduce or eliminate the private loan as this deposit would come off both portions of the loan.

People get into trouble, especially with LOCs where they put all salary in and then withdraw for expenses. If you do this on a house that you live in it is fine, but if you were to move out later and rent this house then you may have a huge loan still, but none of the borrowings may be deductible.

Ah finally, I get it. Thank you

 

[Noodle]

Really? For someone not trying to tax dodge you ask a lot of questions about how they would find out if you did something illegal. For one you need to list what the investment is so you can claim against it.

Thanks for the vote of confidence Although I genuinely didn't get it as have always left this sort of stuff to my accountant.

 

[Proprtyhunter]

Its the purpose they funds were used for that determines deductibility. The purpose of the borrowings isn't 'private' or 'investment' but what the funds were used to buy. This doesn't change.

So if you borrow $100,000 to buy a house to live in the purpose is buying the house. If you later move out the loan is still attributed to the buying of the house so if you rent this house and it is producing income the interest on the loan used to buy this income producing asset is deductible.

However, if you were to increase this loan by $10,000 to buy a car for personal use and then you later move out of the house you will still only be able to claim the interest on $100,000 and not $110,000.

Incidentally, if you did just have one big loan of $110,000 then you could only claim 100/111th of the interest and you could not deposit $10,000 in to reduce or eliminate the private loan as this deposit would come off both portions of the loan.

People get into trouble, especially with LOCs where they put all salary in and then withdraw for expenses. If you do this on a house that you live in it is fine, but if you were to move out later and rent this house then you may have a huge loan still, but none of the borrowings may be deductible.

What the rule if the loan is to renovate the property and later rent it?

 

[Terry_w]

What the rule if the loan is to renovate the property and later rent it?

If the borrowed money relates to that property then the interest on those borrowed funds would generally be deductible if that property is rented or later rented.

 

[lamp]

Hi Everyone,

This is my first time posting here. Please excuse me if I happen to post stupid questions or not using terms properly!

Not sure if the initial scenario posted in this thread is also applicable to my scenario. As I am planning to buy my 2nd property, I have been thinking if the following arrangement is legitimate?

I’m currently living in property 1 (P1), home loan is paid into an offset account and already paid up 99% ($150, 000).

My plan is to buy my 2nd property (P2), a bigger house to move in and then lease out P1.

If I take out $100, 000 from P1 and pay into P2 (i.e. P1 is now owing $100, 000), when I least out P1, will the interest charged for P1 tax deductable?

Note that I have previously least P1 for about 4 years, then moved back in till now for another 3 years.
Thanks in advance
Lamp

 

[Terry_w]

If I take out $100, 000 from P1 and pay into P2 (i.e. P1 is now owing $100, 000), when I least out P1, will the interest charged for P1 tax deductable?

Note that I have previously least P1 for about 4 years, then moved back in till now for another 3 years.
Thanks in advance
Lamp

You will be borrowing $100,000 to use for P2. If you are living in P2 the interest on these borrowings won't be deductible.

If you are talking about using money in the offset then this is not borrowings so won't be an issue.

 

[Rolf Latham]

If I take out $100, 000 from P1 and pay into P2 (i.e. P1 is now owing $100, 000), when I least out P1, will the interest charged for P1 tax deductable?

If the 100 k from P1 is coming from your offset account, and it was always there ( accumulated savings and not borrowings) then deductability is ok.

But as Terry said if borrowing via redraw OR a new loan on P1, then the purpose of that new loan is for personal purposes, and is a no go for deductability.

Perhaps you can tell us what the current loan balance ison P!, and whats in the offset, that would help,

ta

rolf

 

[BMan]

as terry said

are you paying the money into the offset account or into the homeloan?

if you paid it into the offset account you can just transfer it into P2's Offset account (or if there with the same bank and your lucky) you might be able to switch offset accounts so you dont need to change where your salary goes etc

 

[lamp]

Thanks everyone for the advice.

I've been putting all my salary into the offset account.

The 100 k from P1 is coming from my offset account, and it has always been there ( accumulated savings ).