One loan servicing multiple property expenses - accounting nightmare or not?

[Wishlist]

For those with a LOC account secured against a PPOR, from which all property expenses (& no personal expenses) are deducted - what do you do at tax time to apportion the interest costs from that LOC to each IP? Is it necessary to do so and how do you calculate it?

Would seem that as a portfolio increases, then one LOC could become a problem at tax time.

Thanks
Wishlist

 

[The Wild One]

It's not necessary to apportion what intrest has been accummalated for each property or transacation for taxation purposes. It's only necessary if your trying to keep close tabs on what each property is costing you.

As long as all the interest that your claiming as a tax decution, has occurred as a result of maintaning running costs for your Investment portfolio.

Interest and expenses can be mixed up like a glass of cordial. Just as long as you can show why or how they occcured. That's what's important.

 

[The Fence]

Not so sure about that Wild One.....I'm sure you have to account for each IP separately and run it's own books so to speak....it's at the end of Tax asessment that it all goes against your taxable income in one big heap....

In saying that, I believe you can use the LOC funds but need to apportion interest acordingly....would help if you could split the LOC up into different accounts each one assigned to each IP......at least that's what my accountant says anyway....he took over from Dale GG who also advised me in this way and what we have been doing from day one....

I could be wrong so best you seek advise from your acountant as I'm not qualified, just relating what I believe to be true....

 

[The Wild One]

I'm pretty sure I'm correct.

If you have fourty IP's, you don't need fourty LOC's.
Just one or two per financial insitution that you have mortgages with.

You could if you want, just have one big fat loan for everything. The ATO don't care, just as long as you can show a two year old that the funds drawn were used to service your IP's.

John.

 

[boods99]

In saying that, I believe you can use the LOC funds but need to apportion interest acordingly....would help if you could split the LOC up into different accounts each one assigned to each IP......at least that's what my accountant says anyway....he took over from Dale GG who also advised me in this way and what we have been doing from day one....

Hi Thorpey,
I share your thought on being able to separate the LOC into different accounts to keep track of each individual property, but have been advised that to do so after it has been set up is impossible. You have to apply for all new LOC's. Sux.

Wildone,
You can go back through your individual loan statements, as they will show all interest applied to the loan. (assuming you have individual loans for each property)
It then leaves the question of capitalised interest on the LOC....that could be a different thread all together!

Boods

 

[Propertunity]

Not so sure about that Wild One.....I'm sure you have to account for each IP separately and run it's own books so to speak....it's at the end of Tax asessment that it all goes against your taxable income in one big heap....

Yes exactly.....you have an accounting nightmare pending.

 

[Pablo]

Also if you have one LOC for numerous IP's and then sell one of the IP's you will have non deductable debt mixed in with it.

 

[LynnH]

As others have said, all expenses need to be allocated to the property to which they relate.

At least your accountant will love you!

Cheers
Lynn

 

[Joe D]

Yes you need to apportion to individual properties or investments, but it is not difficult if you are reasonable using excel.

I have several LOCs for different purposes and I have a few properties where I pay expenses from one of my LOCs.

I simply set up a spreadsheet with the following columns on the left hand side: Date, Description, Debit, Credit, Balance.

On the right hand side are the two columns for each property (ie. Amount and Cumulative total).

I then cut and paste the data directly from my online bank account into the left hand columns of the spreadsheet.

I then simply re-enter each line item expense into the “amount” column for the respective property. The monthly interest on this LOC simply gets apportioned across each Property in direct proportion to the cumulative total.

Deposits into the LOC are treated the same way. It either gets offset against the particular property or apportioned across all properties.

I include a “check” column on the far right to ensure the balance matches that of the LOC.

Interest pertaining to each property can easily be summed at the end of the FY and added to any other loans on the particular property.

 

[The Wild One]

Is it necessary to do so and how do you calculate it?

Wishlist, I may have misunderstood your question. If so, please accept my apologies..

Is it a requirement by law to apportiion the interest accured on a LOC for expenses drawn? No It's not acording to Tony Crompton ( Author of Rental Properties and Income Tax ) and my accountant. Just as long as you can show that the expenses drawn were used to maintain your Ip's.

Expenses like, Body Corporate contrubutions, Insurances, Wealth Package fees, Council Rates, stationary, repairs, and so on, are typical examples of expenses that might be drawn from a LOC and have accrued interest. Your not required by law to list that you used 24 pieces of paper for IP#4 and 63 for IP#5 and the interest accured for each staionary item was 24 cents. Nor are you required by law to apportion the interest accured for your Body corporate fees for IP#4 and interest accured for repairs to IP#6.

However, like Joe D said. You should set up a spread sheets to keep tabs on what has been spent to hold and maintain each property.

I find a Collins A60 Series Analysis book perfect. I have it divided into equal sections per property. I call it my day book. When a bill is paid, I write it in. My headings are: Date, Paid too, Comments, Description, cost, interest, Manager, and rent received.

But your not required to apportion the interest for every single expense drawn from your LOC. That's crazzy.

John.

 

[Wishlist]

Wishlist, I may have misunderstood your question. If so, please accept my apologies..

No, you have understood me correctly

Is it a requirement by law to apportiion the interest accured on a LOC for expenses drawn?

No It's not acording to Tony Crompton ( Author of Rental Properties and Income Tax ) and my accountant. Just as long as you can show that the expenses drawn were used to maintain your Ip's.

........But your not required to apportion the interest for every single expense drawn from your LOC. That's crazzy.

John.

Yes, it was the legal requirement about interest on the LOC that I was concerned about. Certainly the cost breakdown of maintenance expenses, Body Corp, insurance etc would be allocated to each individual property, but with multiple minor and major expenses coming out of a LOC, breaking down how much LOC interest is attributable to each property is 'crazzy', and not to mention lots of work if you don't need to do it - unless as you say Joe D you sort out an excellent Excel spreadsheet.... care to share???

So Wild One, where do you allocate the interest on your LOC when it comes to tax time? Do you just throw it all against one property, understanding that if every required, you could show that all expenses taken from the LOC were of a deductible nature?

I wonder if anyone here has had to go through an audit on their rental properties? It would make a good thread topic if it isn't here already.

Wishlist

 

[The Wild One]

HI Wishlist.

I thought that was what you were asking.

Can I say, that I don't do things perfectly and I do have some cross cattralala... Who doesn't ?? You've got to come up with more deposits some how.

I run two LOC's One with CBA and one with Werstpac. My very first ip was bought with a LOC for 75k. Limit was 90k. I've managed to by another 6 ip's by refinancing. But all through my journey I have allacated the interest on LOC to my first ip.

John

 

[kathryn d]

Yes, it was the legal requirement about interest on the LOC that I was concerned about. Certainly the cost breakdown of maintenance expenses, Body Corp, insurance etc would be allocated to each individual property, but with multiple minor and major expenses coming out of a LOC, breaking down how much LOC interest is attributable to each property is 'crazzy', and not to mention lots of work if you don't need to do it - unless as you say Joe D you sort out an excellent Excel spreadsheet.... care to share???

So Wild One, where do you allocate the interest on your LOC when it comes to tax time? Do you just throw it all against one property, understanding that if every required, you could show that all expenses taken from the LOC were of a deductible nature?

I wonder if anyone here has had to go through an audit on their rental properties? It would make a good thread topic if it isn't here already.

Wishlist

We are going thru an audit now, but this is Canada.
Luckily it is for 2005 & 2006, when we only had 5 properties.
We just submitted our "objection" on the weekend, so hopefully some the deductions will be considered current year and not added to CCA.

The worse part was, when searching for papers, and looking at our 2007 tax return, we discovered our accountant put our renovation costs under maintenance.We are sure this will signal a red flag for Revenue Canada, so have gone thru everything, and will be doing our 2007 & 2008 taxes with a new accountant.(yes, we are late filing 2008, but there was no sense filing it with the wrong info)

For the last 9 months, Revenue Canada has threatened to garnish my wages, even when we were still in the middle of the audit.Finially in April they did...they took 40 % of my takehome pay.I convinced them to reverse it, until we at least received the reassessment.
Last week I voluntarily asked my employer to with hold 84 % of my take home pay for Revenue Canada. It shows intent to pay, and I don't want to be garnished.

Will just need to keep fingers crossed everything works out ok.
At lease now we are doing a trial run of what it will be like next year,without my income, when I quit work for good.

 

[Leikela]

You'll find that most accountants computer software will require that they input each property separately and so you will need to identify which expenses, including interest relates to which property. If 100% is tax deductible then it doesn't need to be exactly accurate as to what interest relates to which property. Just roughly split it up. The main issue is when clients mix loans between private and deductible interest. In any event, make sure you do all the calculations, if you can, because it will save you $$, rather than your accountant having to go through all your bank statements and documents trying to do it. The more organised you are, the less your accounting costs will be.

 

[Qlds007]

Interesting to see that Anz is launching a new investor product specifically to deal with splits and from what i understand will be able to have 15 sub accounts.

 

[Rolf Latham]

Original name and concept too ...............Not

Comes on the back of them introducing their "repayable" on demand variations to xisting LOC facilities.

ta
rolf