Maximize borrowings, reduce tax

[narcissusford]

Hi all

I wish to know what is the most tax effective means of borrowing for a purchase of an IP.

My situation is as follows.

? I recently purchased a PPOR valued at $800k. I have a loan of $700k of the purchase price, and $450k parked in an offset account. This means that the net loan amount is $250k.

? My income, including super, is $155k p.a.

? I am single with no dependants.

? I wish to purchase an IP with a value of $730k.

? I expect that I will enjoy rental returns of approx. $650 per week on the IP.

To maximise tax deductions, is there a way that I can borrow the full purchase price, and out-of-pocket costs associated with, the IP (i.e. borrow $770k inc stamp duty)? Can I do so in a way that would avoid LMI?

Thanks as always!

 

[Brady]

Yes definitely, debt recycle.


You need $770k for IP purchase


Borrow 80% against the IP, so $584,000

Borrow $186,000 against the existing PPOR

To do this you will need to decrease the existing loan.

Pay down existing loan to $516,000 from funds in offset

Then reborrow (separate loan) $186,000 for the IP



End result

$584,000 FOR IP secured against IP

$186,000 FOR IP secured against PPOR

$516,000 for PPOR secured against PPOR

$264,000 in offset against PPOR



DONT USE YOU CASH FOR THE IP as cash isn't tax deductible.

 

[Peter_Tersteeg]

Very simple and it's quote common practice. You can borrow against the equity in your PPOR for the specific purpose of raising the deposit and purchase costs of the investment property. Since the purpose of that money would be for investment use, the loan will be tax deductible even though it's secured by your PPOR.

You then borrow the remaining money needed for the IP purchase directly on the IP. Essentially through all this you're borrowing the full value of the IP, plus the purchase cases in a tax deductible manner.

Do not use money from your offset account. This does not give you any tax benefits and it increases your non-deductible debt.


Now that that's been said, you shouldn't be looking at an investment for the sake of reducing your tax. This can lead to some very bad investment decisions. If an investment is giving you tax deductions, it's because it's loosing money in some way. You're better off to have an investment that causes you to pay more tax (not less), because this means you're making money.

There are plenty of ways to get tax deductions through property and still make money on the deal, but if your primary purpose is to save tax, you're starting with the wrong attitude.

Here's another really easy and socially nice way to pay less tax: Donate to charity, it's fully tax deductible.

 

[narcissusford]

Excellent - thank you both Brady and PT_Bear for a thorough and prompt explanation.

Just to elaborate, I do not intend to invest merely for tax advantage. Ultimately my aim to make a capital gain, which, on my calculation, will be possible if I make more than 1% capital growth each year on the property, which I think is feasible in the long run.

 

[r3ckless]

I think this thread should be a sticky. Excellent posts as above

 

[skater]

I wish to purchase an IP with a value of $730k.

I expect that I will enjoy rental returns of approx. $650 per week on the IP.

Hold on a minute. Pete has mentioned the folly in investing to 'save tax', but have you really thought about your investment choice?

You are looking at something costing $730k (heaps more when you add in Stamps & Closing costs) with a return of $650pw. That's a return of less than 5%.

What makes you think that this will be a good investment?

 

[narcissusford]

Hold on a minute. Pete has mentioned the folly in investing to 'save tax', but have you really thought about your investment choice?

You are looking at something costing $730k (heaps more when you add in Stamps & Closing costs) with a return of $650pw. That's a return of less than 5%.

What makes you think that this will be a good investment?

Fair question, and one which I am still contemplating the answer to. But in summary, while the rental yield might be low, I believe that the property will enjoy fairly strong capital growth, provided I hold it for a reasonable period of time.