LOC and Tax deductability

[Boomer]

Hello everyone,

I am looking at setting up a LOC on my PPOR to use for investment purposes only. I would be looking at using it for debt recycling to try and pay down the non deductable portion of our PPOR loan quicker - I would pay rates, water and other IP related bills through the LOC set up againt the PPOR and additionally may purchase managed funds through the LOC. The loan on the PPOR is in both my partners and my name, as I understand it this would mean that any interest deductions from the LOC part of the loan would be required to be split 50/50. The only other important piece of information is regarding the IP loan, it is in my name only.

Now my question: in the above setup does the fact that the IP property and loan are set up in only my name affect how the deductability of the LOC is applied?

If anyone knows or has experience of the above structure and its tax implications I would appreciate your feedback.


Thanks,

Boomer.

 

[LynnH]

Boomer

The interest deductions from the LOC are not required to be split 50/50 when the entire amount drawn down from the LOC is used to pay expenses for an IP in the name of only one person. This is exactly the situation we have - PPOR plus LOCs in joint names, LOCs used for property expenses for IPs owned by hubby (he is working, I am not).

The way it was explained to me, the ATO regards my 'half' of the LOC as being loaned to hubby, who then 'pays' me interest to use this money. Thus hubby is entitled to the interest deduction for his 'half' of the LOC plus a deduction for the interest he 'pays' to me for my loan to him of my 'half' of the LOC. Since all of the interest pertains to the IP, then this is tax deductible to hubby. In practice, the whole of the interest is claimed in hubby's tax return, and no paperwork is required for my 'loan' to him etc.

The ATO acknowledges that in this sort of situation, the banks usually require the LOC to be in the names of both partners, since the PPOR is in joint names. Just make absolutely sure that everything that goes into and comes out of the LOC is IP-related.

You mentioned also purchasing MFs through the LOC. Personally, I would set up a separate LOC for the MFs - simplifies the accounting, and basically I'm lazy when it comes to that sort of thing!

If you have any doubts, please find yourself a property-savvy accountant - most of on on SS are not qualified to give investment advice.

Cheers
LynnH

 

[Boomer]

Thanks for that LynnH - I was hoping that was the case, just wasn't sure.

 

[devo76]

Hi guys. I also have some questions. I understand that if you use the LOC for IP costs like deposit,accountant, etc etc. The owed amount is tax deductible. But what if you use the LOC to pay for the shortfall in loan repayments and rates, realestate fees etc. Does it work that way.Someone told me that if you have a LOC approved to say $100,000 and you use $50,000. Each month at repayment time, if you are short it will just be added to the LOC owed amount. Is that true and if so is the total of the new amount Tax deductible.
Hope that makes sense.

 

[LynnH]

devo76

The short (and very simple) answer is "yes", as long as all the expenses relate to your IP. But it can depend on your individual situation - if you are doing it with the intention of avoiding tax, then the ATO can grab you under Part IVA if the ITAA.

May I suggest that you read the Sticky called "Interest on Interest and Capitalising Interest - The Facts" which was started by Corsa (who is an accountant) - this is second from the top of the Accounting & Tax Section. There is a lot of reading involved, but it is very much worth taking the time to read it!

If you still have any questions/doubts, please consult a property-savvy accountant - there is absolutely no substitute for good professional advice!!!

Cheers
LynnH

 

[Pablo]

Hello everyone,

I am looking at setting up a LOC on my PPOR to use for investment purposes only. I would be looking at using it for debt recycling to try and pay down the non deductible portion of our PPOR loan quicker - I would pay rates, water and other IP related bills through the LOC set up against the PPOR and additionally may purchase managed funds through the LOC. The loan on the PPOR is in both my partners and my name, as I understand it this would mean that any interest deductions from the LOC part of the loan would be required to be split 50/50. The only other important piece of information is regarding the IP loan, it is in my name only.

Hi,

This is good timing as I was going to post a question with a similiar theme except my situation is the opposite.

My PPOR and LOC are in my name alone while the IP and its loan are in joint names (50/50). The LOC has been used to pay 20%, buying costs, and IP bills up to now. In this situation can I still claim 100% of interest on the LOC (50% allocated to me and 50% allocated to my girlfriend) or can we only claim 50% as that is my share of the property?

Thanks for the help,
Pablo.