Is this a legitimate tax strategy?

Hey all,

Would someone be able to let me know if this is legitimate tax strategy or not allowed.

If you use personal money to build a granny flat on an investment property and then refinance that property, to a new valuation (because of the increased added value of the added granny flat), can you then put that money back into your personal account and claim the increased loan against the investment property as tax deductible?

I hope that makes sense, any help would be much appreciated! :)
 
No.

You need to look at 'use of funds'

The cash you put into the granny flat is what paid for the granny flat.

You then 'redraw' equity - what ever you spend that money on is the use of that loan. The only way these funds would be tax deductible is if you purchased another income earning asset (eg, another IP, shares, etc).

The only exception to this would be if the IP is owned in a separate entity (eg Trust). You could lend the funds to the Trust to build the granny flat - then re-draw increased equity - and repay the existing loan (effectively a refinance).

Blacky
 
Thanks Blacky!

Hmmm, I wonder if there is a way that you can get the bank to give you an increased loan based on granny flat official plans, i.e.. Future added equity, that way you don't have to put money from your personal account and the use of the loan would be investment purposes from the get go...
 
I agree with Blacky.

No you cannot claim the interest. You are borrowing to invest into a savings account which doesn't produce income. the granny flat is already paid for in this instance.
 
Thanks Blacky!

Hmmm, I wonder if there is a way that you can get the bank to give you an increased loan based on granny flat official plans, i.e.. Future added equity, that way you don't have to put money from your personal account and the use of the loan would be investment purposes from the get go...

Yes. Its called a construction loan.
The bank will lend on the future value based on the build. However it may not 100% of the build, may be 50-80% depending on location.
 
Thanks Blacky!

Hmmm, I wonder if there is a way that you can get the bank to give you an increased loan based on granny flat official plans, i.e.. Future added equity, that way you don't have to put money from your personal account and the use of the loan would be investment purposes from the get go...

One option might be to use the cash as security. Most banks will take a cash deposit as security at 100%. Therefore you could take out a loan, build the granny flat - re-draw the equity from the property and re-pay the loan. Thus releasing the cash security back into your account.

Also - speak to your broker, you may be able to either get a loan top-up and any shortfall covered by a (unsecured) personal loan. This will cost you a bit, however, if you are confident it will be short term it may be worth while.

Some second tier lenders may even be willing to take a second mortgage for it.


Blacky
 
I agree with the others. Have a chat to your broker. You should be able to get a construction loan, then you've got no issues with it.
 
Wow great options!

I like the sound of cash as security and the construction loan idea !

Great input ! Thanks everyone !
 
Consider related party loans.

It can be handy for spouses to keep finances separate for these sorts of reasons. In at least one private ruling the ATO has accepted a husband borrowing from a wife.
 
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