Maintaining destructibility of split loans?

[Propagate]

Maintaining deductibility of split loans?

Hi all, I thought this seemed obvious, but I'm now reading conflicting arguments and wondering which is correct?

Scenario:-

IP1 - Purchased using 95% loan against IP1
IP1 - Deposit and costs as a split loan against PPOR

Essentially, 100% of the borrowings interest for IP1 is tax deductible as both loans were used for the purchase of the IP regardless of the second loan being secured against the PPOR.

Fast-forward a few years and IP1 has built equity.

IP1 - Extract additional equity by way of a new loan split secured against itself.
IP1 - New loan split is equal to the original deposit split deposit secured against the PPOR
IP1 new loan split pays off the original PPOR deposit split, (balance now zero but loan left open for future deposit on another IP with PPOR as security).

The total borrowed amount for IP1 remains the same as the outset.

Although the new split against IP1 was used to pay off a loan against the PPOR, that PPOR secured loans purpose was for the IP, so does the purpose of the new split essentially become a re-finance of the original split, in simple terms all we're doing is changing the security?

What I'd like to do is have all the debt for a particular IP secured against itself as we progress and as they build equity. Can I do this without losing the tax deductible status of the original splits used for deposits?

As an aside, the small deposit splits against the PPOR have never been contaminated with other debt. They paid deposit, fees, stamp etc and were not drawn down any further at any time since.

Cheers.

EDITED - changed thread title from "destructibility".

 

[Rolf Latham]

Messy

But commonly done usually for emotional or bookkeeping reasons.

If the deposit loan on the ip was repaid wiith another loan from another property, and it's clearly identifiable as so, I'd suggest this is deductible since a refinance of the entry hasn't changed the nature of the debt, only the security.

We do a bit of this stuff with portability where the lender is the same between props

I'm sure one of the accts will provide a better explanation

Ta

Rolf

 

[Propagate]

Messy

But commonly done usually for emotional or bookkeeping reasons.

If the deposit loan on the ip was repaid wiith another loan from another property, and it's clearly identifiable as so, I'd suggest this is deductible since a refinance of the entry hasn't changed the nature of the debt, only the security.

We do a bit of this stuff with portability where the lender is the same between props

I'm sure one of the accts will provide a better explanation

Ta

Rolf

Thanks Rolf, I figured it should be OK, (but then again, when it comes to tax issues the assumed logical isn't often correct).

I can't really see how it is different from say refinancing the original IP loan, which must be fairly commonplace?

It's purely for bookkeeping. I like the idea of the IP's having all of their own borrowings secured against themselves over time, rather than continually chasing deposit chains. I.E if I split the IP loan agian now and use the new split as deposit on the next IP, I'd have 3 house with 2 loans each, secured on 2 different properties if that makes sense?

By using the new split to repay the original costs split, then using the original split as the next deposit it means that each IP eventually carries all it's own borrowings rather than being in a longer and longer deposit chain.

Of course, that changes if equity in the IP keeps going up and we further split for more IP's as I realize we can't increase an IP's deductible borrowings to a sum greater than the original borrowings used for that particular property.

BY the way, different lenders for the deposit and main loans if that makes a difference?

Cheers.

 

[Paul@PFI]

But you cant refinance and increase the loan to tap into IP1 equity...The use of the new loan (increase) isn't to acquire / refinance. The new increase loan is non-deductible.

 

[Propagate]

That's the point, the use of the new loan IS to refinance. It pays off the deposit loan that's secured against the PPOR. Only change is security and lender, overall loan amount does not increase.