Loan on Equity - Tax deductibility question

[mumbai]

I am in process of buying my next IP. The cooling off period ends in a couple of days and then I need to pay the 5% deposit.

The deposit is supposed to be paid through the loan on equity from my last IP. However, the process (to get money in my account) may take longer than a couple of days.

I have money saved in my offset account and can easily pay the 5% deposit.

My question is whether it is advisable to use the money from my offset account to pay the deposit and then later when I get the loan money in my account, I can put it back in the offset account.

Is this normal and will I face any issues with the tax deductibility?

 

[D.T.]

No
Dont do that.

 

[mumbai]

No
Dont do that.

Can you please elaborate?

 

[Peter_Tersteeg]

There's no ideal solution at this point. You can't really replace your savings (in your offset account) with equity and expect the same tax deductions.

It's unrealistic to assume that an increase can occur within a few days. There are some lenders that can do this, but the process varies across lenders and can be unreliable. Better to allow yourself 3-4 weeks if you can.

 

[Rixter]

Its the purpose for the drawings that determines deductibility or not.

Interest is only deductible if the drawings are used for income producing purposes.

If you use the drawings to repay money into your offset its not deductible.

 

[Brady]

Accountants please correct me if this isn't correct, but couldn't someone use the cash funds for the deposit. Then process loan for full fund and have the conveyancers credit the original funds back at settlement. Is there an issue with tax?

Mind you I always suggest getting the equity funds made available ASAP, especially when a valuation could be required.

 

[Jamie M]

Accountants please correct me if this isn't correct, but couldn't someone use the cash funds for the deposit. Then process loan for full fund and have the conveyancers credit the original funds back at settlement. Is there an issue with tax?

I've had a couple of clients do this recently.

Communication is important - the rationale behind this needs to be clearly explained to the sellers side, otherwise they'll get scared off and won't allow it.

A deposit bond is another option too.

Cheers

Jamie

 

[tobe]

try a deposit bond.

 

[Terry_w]

If you use cash to pay for a deposit you can substitute this with a loan down the track. BUT the interest will not be deductible as you are not borrowing funds for investment purposes, but to reimburse yourself.


there are 3 solutions:
1. Get vendor to acces $100 for now with the rest in x days
2. Use a deposit bond
3. Borrow the monry and then refinance this loan with your bank loan.

Seek legal advice before doing any of the above.

 

[Brady]

If you use cash to pay for a deposit you can substitute this with a loan down the track. BUT the interest will not be deductible as you are not borrowing funds for investment purposes, but to reimburse yourself.


there are 3 solutions:
1. Get vendor to acces $100 for now with the rest in x days
2. Use a deposit bond
3. Borrow the monry and then refinance this loan with your bank loan.

Seek legal advice before doing any of the above.

Regarding the example I provided above would the funds still be tax deductable?

Example

$300,000 Purchase Price - settlement 1/8

5% deposit paid to REA $15,000 1/5

$315,000 loan settles 1/8 for full proceeds

$15,000 is credited back from the conveyancer


In this case would the $15,000 still be tax deductable?

 

[Terry_w]

Regarding the example I provided above would the funds still be tax deductable?

Example

$300,000 Purchase Price - settlement 1/8

5% deposit paid to REA $15,000 1/5

$315,000 loan settles 1/8 for full proceeds

$15,000 is credited back from the conveyancer


In this case would the $15,000 still be tax deductable?

Possibly. The agent would be holding the $15k on trust. If the purchaser borrowed the full amount and paid the vendor it would be borrowings for investment purposes. Once settled the money held on trust could be returned to the purchaser.