Is this legal?

Hi All,

We're currently renting close to work while investing in IPs. The plan is to buy a PPOR and move somewhere close to a school when my son is a bit older (say 1.5-2yr from now).

I understand that the deductability of loan is based on its purpose, so we've been thinking of how to minimise our bad debt. Just want to know if scenario below is legal and could work?

- When it's time to buy PPOR, pull $ from our current LOC (say LOC1) used to buy PPOR outright.
- When settled, get an LOC against PPOR (LOC2) and park $ back in original LOC1 until needed for further investment. Since purpose is for investment, does that mean that interest for LOC2 is tax deductible?


Thanks!
 
- When it's time to buy PPOR, pull $ from our current LOC (say LOC1) used to buy PPOR outright.

So the purpose of LOC1 is to buy a PPOR - hence not deductable.

- When settled, get an LOC against PPOR (LOC2) and park $ back in original LOC1 until needed for further investment.

The purpose of LOC2 is to refinance a debt LOC1 - takes on purpose of the original debt. Hence, purpose is still for the purchase of PPOR - hence is not deductable.

Regards,

Jason
 
I assume that the LOC1 was to purchase an investment property and that you have room in that LOC to purchase the PPOR.

Is that correct?

If that is correct, then this loan remains as for investment purposes, however the draw down if used for private purposes can not be claimed as Tax Deductible.

Your proposed LOC2 will be non tax deductible as it is for a PPOR.

What you are proposing will come out in the wash so to speak, and you will be left with the original LOC1 as deductible and a new LOC2 not tax deductible.

However I am not sure why you need to do that. It would be far cleaner to see a mortgage broker to obtain a pre approval for the new purchase.

If you are needing to use equity from the existing IP to make this purchase, a broker will advise you on the best way to structure the 2 loans.

Hope this helps.

Regards
Steve Roberts
 
change your loan to a term loan interest only with an offset account rather than a LOC, and you have no problems, as offsets are deemed as savings accounts, rather than loan accounts for the ATO purposes. There are loads of threads on this issue.
 
yeah, forget the LOC and go IO+offset, then all the money in the offset goes to PPOR (in a IO+offset loan against PPOR, unless you're 100% you'll never want to convert it to IP in future)

if you're trying to find a way to get tax deductibility on both IP and PPOR, when PPOR is clearly not going to be an IP, then you're wasting your time.
 
Do a search on here for debt recycling, it may have the same effect you are looking for, over a longer timeframe.
 
Here's a case study which explains the strategy:

+++++++++++++++++++++++++++++++++++

Lilly and Daniel approached us as they wanted some advice on how they could own their home sooner so they could invest further. Lilly was concerned about the level of their home loan and, despite all their efforts to repay it quickly, the balance wasn't reducing fast enough (for her). Lilly wanted to know if they should sell their investment property and use the sale proceeds to repay most of their home loan (although Daniel wasn't keen on that idea because the investment property had performed very well - strong capital growth and zero vacancy).

Lilly and Daniel's financial details are:

* Lilly's income: $110,000 p.a. before tax
* Daniel's income: $89,000 p.a. before tax
* Home loan balance: $582,000 (home is worth $1.2 million)
* Investment loan: $550,000 (investment property is worth $1.1 million)
* Net rental income (after expenses excluding interest): $33,000 p.a.
* Surplus income (after paying for everything including living expenses): $24,000 p.a. after-tax (this currently being directed into the home loan as extra repayments).

Currently, they are making interest only repayments on their investment property loan (net rental income pays for most of these repayments and they contribute approximately $5,500 from their salary income). They are also making the minimum principal and interest repayments on their home loan of $46,500 p.a. plus any surplus income - currently $24,000 p.a.

Our solution: we suggest that they don't make any repayments on their investment loan. Instead, allow the interest to be added to the loan. This will allowed them to direct all income including rental into repaying the home loan. Therefore, home loan repayments will be the minimum of $46,500 plus net rental income of $33,000 plus the $5,500 that was previously being directed into the investment loan plus surplus income of $24,000 ($109,000 in total). We call this the 'repayment flexibility structure' because it provides you with the flexibility to direct all repayments into one account (the home loan). Remember, the amount of repayments is not changing - it's just that they all go into one account.

This is what will happen in the first year:

Home loan
Opening balance $582,000
Plus interest $38,500
Less repayments $109,000 (per above)
Closing balance $511,500

Investment loan
Opening balance $550,000
Plus interest $38,500 (added to the loan)
Closing balance $588,500

At the end of the year the total debt is $1.1 million ($511,500 + $588,500) compared to $1.132m at the start of the year. Total debt has reduced. The other benefit of this structure is that the clients now have proportionally more tax-deductible debt and less non-deductible debt. Each year the clients home loan will reduce at an accelerated rate in return for their investment debt increasing. For example, by year 5 their home loan will be $174,000 and investment loan will be $780,000. This will result in higher negative gearing benefits - i.e. less tax payable.

In 80 months (6.7 years) they would have repaid their home loan in full. By this time, their investment loan will be $875,000 (because of the accumulated interest). This debt can now be solely secured by the investment property alone which means that they will fully own their home (unencumbered) with no debt. They'll safely hold the title, not the bank which is exactly what Lilly wanted.

Under the traditional structure (i.e. what they were doing before our advice), it would have taken the client's 148 months (over 12.3 years) to repay their home loan. This means they would have paid over $140,000 more interest (from after-tax income)! Lilly and Daniel would have had to earn over $230,000 pre-tax to have met this (after-tax) interest cost. That's a huge saving in anybody's language.

In 6.7 year's time, the clients can either concentrate on repaying the investment loan or invest their surplus cash (e.g. maybe buying another investment property).
 
This will result in higher negative gearing benefits - i.e. less tax payable.

I think you meant to say the capitalisation of interest strategy will allow them to buy more investments more quickly so in the longer long term they can earn more TAXABLE income ;)

ta
rolf
 
Our solution: we suggest that they don't make any repayments on their investment loan.

this sounds like a pretty major thing (ability to just stop paying interest payments) that was just introduced with one sentence, as if commonplace, that you can do this on all IO loans - can you? if not, which loans allow it (whats the common name for it if its a loan feature? interest capitalisation?)
 
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