Is my DEPOSIT paid tax deductible

[darrelj]

Here is the scenario in the order it happened.
The purchase price of property is 300,000
I made a deposit of 15000 using my savings
Then waited for the bank to work out my mortgage loan.

A loan was passed for 330,000 and that's the amount that my repayment will be calculated on.

i think i will not need that much as a 15000/ deposit was already made.

My question is - under the above circumstances, is my deposit tax deductible?
I have read somewhere that it is not, because the deposit was made from my savings. If so how can i correct this, is it too late.

 

[D.T.]

No way. It's not deductible

If it was taken from a loan instead of from savings , the interest on that loan woul be tax deductible but the deposit itself never is. It's too late to change that.

 

[darrelj]

No way. It's not deductible

If it was taken from a loan instead of from savings ,

But how would anyone make the deposit from the loan as the deposit happens well before the loan is worked out? am i right.

Secondly, can I get them to refund the deposit i made and pay it back from the approved loan. The settlement is in 3 days time

 

[travelbug]

How come you have $330K? Was it borrowed with security on another property?

You can't claim more than you paid.

If it cost $300K you can claim that (assuming you paid it out of the loan) + solicitor etc if you paid for that out of the loan.

 

[darrelj]

How come you have $330K? Was it borrowed with security on another property?

You can't claim more than you paid.

If it cost $300K you can claim that (assuming you paid it out of the loan) + solicitor etc if you paid for that out of the loan.

Yes it was using equity from present home.
The investment home costs 300,00. As i have already paid deposit 15000 i only need 285,000 plus the associated other expenses (which we will know on Monday). I told the bank that I don't need 330,000.

But the bank says you will have a little in excess once all are settled.

I am puzzled?

 

[travelbug]

Ok, unfortunately the bank has cross securitized your properties.

I made this mistake when I bought my first property. It was a bit of a hassle to untangle but did it. The reason for not crossing is that if you want to sell one it can be difficult if one won't support the loan by itself.

In hindsight you would have been better getting an 80% loan against the IP and getting a LOC (or loan) seperate to pay for depostis.

OK you now have that little extra in the loan. Be VERY careful to not spend it on anything but investments as this will contaminate the loan which cases tax problems.

Uncross the loans as soon as you can. You can do this by waiting a while until the IP has gained CG and the IP can handle the loan by itself. The IP would need a valuation of $380K to hold a $300K loan (at 80%) Refinance the IP seperately then. I hope that makes sense.

As mentioned you will claim interest on your costs that you have deducted from the loan.

 

[darrelj]

Be VERY careful to not spend it on anything but investments
Thank you. You have been very clear in this explanation.

I anticipate 10,000 to remain after settlement. Should I use this to
1. Pay part of my current residential home loan? this will reduce my repayment on that.

or
2. put back the 10K to the IP loan (paying off part) - this will reduce my interest repayment for the IP

I do have an accountant. But tips from people like you helps to be ahead of accountants.

 

[The Y-man]

Be VERY careful to not spend it on anything but investments
Thank you. You have been very clear in this explanation.

I anticipate 10,000 to remain after settlement. Should I use this to
1. Pay part of my current residential home loan? this will reduce my repayment on that.

or
2. put back the 10K to the IP loan (paying off part) - this will reduce my interest repayment for the IP

Neither.......... you put it in an offset account....which I hope you set up or there may be even more pain in the future.....


The Y-man

 

[travelbug]

Be VERY careful to not spend it on anything but investments
Thank you. You have been very clear in this explanation.

I anticipate 10,000 to remain after settlement. Should I use this to
1. Pay part of my current residential home loan? this will reduce my repayment on that.

or
2. put back the 10K to the IP loan (paying off part) - this will reduce my interest repayment for the IP

I do have an accountant. But tips from people like you helps to be ahead of accountants.

No you CANNOT put it in your home. This is what I mean by contaminating the loan. Your home loan is a private loan. The investment loan is for investments. Do not get them mixed.

The "extra" money is not really extra that you have. So you can't pay down the loan.
EG The loan will be for $330K but you have only borrowed $320K so you have $10K spare to spend on something else. You only pay interest on what you have drawn down.

As you have a loan on your home make sure the one attached to the Ip is interest only so all your money is going to pay down the non deductable loan.

I've sent you a Private message. Check top RH corner under your name.

 

[darrelj]

Cant fnd this message. Nothing shown

 

[Terry_w]

Here is the scenario in the order it happened.
The purchase price of property is 300,000
I made a deposit of 15000 using my savings
Then waited for the bank to work out my mortgage loan.

A loan was passed for 330,000 and that's the amount that my repayment will be calculated on.

i think i will not need that much as a 15000/ deposit was already made.

My question is - under the above circumstances, is my deposit tax deductible?
I have read somewhere that it is not, because the deposit was made from my savings. If so how can i correct this, is it too late.

Deposits are a payment of capital and are never deductible.

But interest on a borrowed deposit may be deductible, however you cannot reimburse yourself so if you pay cash you cannot substitute it with borrowed money later. This will cost you dearly over the next 20 years in lost deductions.

 

[darrelj]

What would have I done at the start itself to avoid this?
Since the settlement happens Tuesday, have I yet got an opportunity to remedy or minimise

 

[Terry_w]

Darrelj

who is advising you on this as it seems you have made a number of mistakes. 3 days to go it will be hard to rectify, but you can minimise the damage. Seek tax advice asap.

 

[The Y-man]

What would have I done at the start itself to avoid this?

A good mortgage broker who understands structuring IP loans.....

The Y-man

 

[darrelj]

Can u kindly list the mistakes I have made as u see

 

[The Y-man]

Here is the scenario in the order it happened.
The purchase price of property is 300,000
I made a deposit of 15000 using my savings
Then waited for the bank to work out my mortgage loan.

Can u kindly list the mistakes I have made as u see

You did it in reverse.

Should be:
1. see (good) mortgage broker
2. set up equity draw down on own home
3. search for property
4. use cash from own home as deposit
5. once deal is signed, notify mortgage broker to set up IP loan



The Y-man

 

[Terry_w]

Can u kindly list the mistakes I have made as u see

This is how I would have suggested you do it:

1. Get tax advice
2. Organise LOC before you start looking.
3. Borrow to pay the deposit on the new property
4. Keep the cash in the offset account on the PPOR loan as the interest is not deductible
5. Use only the money you need borrowing it from the LOC when you need it ? so no issues with borrowed money not being used and no risk of loan contamination, creating mixed purpose loans.
6. Do not cross collateralise the loans. Ie one loan secured by only 1 property
7. Start claiming the maximum available deductions
8. Use the excess money saved to pay off the PPOR much sooner.

 

[china]

This is how I would have suggested you do it:

1. Get tax advice
2. Organise LOC before you start looking.
3. Borrow to pay the deposit on the new property

Why do you recommend LOC versus ordinary home loan? Lets assume the PPOR is fully paid off and I want to draw on equity to use as deposit on IP. I would have thought that an ordinary home loan would be cheaper as a source of funds for a deposit. And there is no risk of cross contamination or tax deductibility issues as the loan on the PPOR is purely for investment purposes.

 

[darrelj]

Be VERY careful to not spend it on anything but investments as this will contaminate the loan which cases tax problems.

What do you by " investments" you mention here? Has it got to be related to the property that the loan was borrowed against? If so give me some examples where i can use it?

 

[The Y-man]

What do you by " investments" you mention here? Has it got to be related to the property that the loan was borrowed against? If so give me some examples where i can use it?

Basically an "investment" in this sense is "something that produces income"

So it can be for:
Rental property
Shares that pay dividends
Managed Funds that distribute income

You can't use it for
Shares tha don't pay dividends
Land (unless it is rented or certian other circumstances)
Precious metals
Collectibles

The Y-man