Lifting LVR to 80% to reduce taxable income

[oh_noes]

I have a negatively geared IP with a loan amount of $250k, valued at $450k. Rental income is $310 per week.

I'd like to borrow $100k to invest elsewhere. My question is, what are my restrictions on this? If I increase my loan (to $350k) my repayments will go up and as such, my negative gearing will be higher.

What's the legalities here? I suspect if I borrow to re-invest into the same property it's okay (ie. new deck or extension) but what about if I want to pull my money out to use it on something else?

Thanks

 

[Corey Batt]

If you use the funds released for investment purposes the funds will be tax deductible - if for non-investment use it won't be. Fairly simple.

Just remember that tax deductibility is determined by the use of the funds, not from what the debt is secured against.

 

[Peter_Tersteeg]

If your loan is interest only, you'll only have to make repayments based on the amount you currently owe. Thus you can get access to the extra $100k, but leave it in redraw until you need it and it won't cost any extra.

Once you use the money, you'll owe more to the bank and your minimum payments will increase based on that.

If the loan is Principal & Interest, you need to make payments based on the schedule outlined in the loan documents, regardless of how much is actually owing.

 

[Paul@PFI]

I have a negatively geared IP with a loan amount of $250k, valued at $450k. Rental income is $310 per week.

I'd like to borrow $100k to invest elsewhere. My question is, what are my restrictions on this? If I increase my loan (to $350k) my repayments will go up and as such, my negative gearing will be higher.

What's the legalities here? I suspect if I borrow to re-invest into the same property it's okay (ie. new deck or extension) but what about if I want to pull my money out to use it on something else?

Thanks

Any funds you draw on the existing IP must pass a test of deductibility. The new loan amount is not deductible against the IP but against the income earned from the new investment. In some cases it may not even be deductible. Worth getting personal tax advice first. The new investment must intend / actually produce assessable income.

Yes improvement deduct higher interest against the IP. I always suggest that unless the improve adds to value or higher rent you should ask why bother ?

 

[Terry_w]

Deductibility to determined by use and purpose of the funds. Interest on borrowings to invest in shares may not be deductible in full if the funds are paid into an offset or savings account with other cash and then taken from there to invest, for example.

Any interest incurred should be an expense against what ever you buy. So negative gearing won't be increased on the house if you borrow to buy shares for example. The interest will be deductible against the share income (if certain conditions are met).

 

[Paul@PFI]

Deductibility to determined by use and purpose of the funds. Interest on borrowings to invest in shares may not be deductible in full if the funds are paid into an offset or savings account with other cash and then taken from there to invest, for example.

Any interest incurred should be an expense against what ever you buy. So negative gearing won't be increased on the house if you borrow to buy shares for example. The interest will be deductible against the share income (if certain conditions are met).

Yep - Its also worth also mentioning that borrowing to buy shares isn't always deductible. Borrowing to buy shares that may appreciate in value isn't necessarily deductible. The key test is that of producing assessable income (not a capital profit!!). Buying shares that have never paid a dividend = Non-deductible. However buying shares like Telstra that pay a ongoing dividend = Deductible even if one of the reasons you buy is to make a profit.
Absurd ??? Well that's the old tax law that operated pre- capital gains tax. Hardly anyone ever bought shares pre-CGT to make a profit. No they bought them for the income. That way the capital profit wasn't taxed. You explain the old rules to young guns in tax and they are astounded. It was avoidance 101 and was 100% legal. PJ Keating slammed the door on the arrangement unfortunately.

Even better was pre-CGT rentals...No tax on profit. Buy pre-CGT if you bought to reno and onsell it was still taxable (no discount either !!). So investors avoided improvements and developments like dual occupancies. You were mad to consider it. Instead investors held long term.

I wouldn't be surprised if tax law was rewritten in future (near future ?) to change CGT discounts and neg gearing in some cases to revert to a more traditional view. That and changes to banking that limit gearing