Paying debt with debt

[malcomb]

I've read all the stuff by property investors who say that if you build up enough equity to place a deposit on a property, then mortgage the newly purchased Investment Property, you only need the new mortgage to draw its interest payments from a planned buffer that you are holding in your LOC which is based on the equity that has been built up. With the understanding that rent paid in to the LOC will cover some of the interest drawings, but the balance owed each fortnight/month would be queried by the ATO if you are trying to claim it for negative gearing purposes. In other words, the ATO will query any debt you are trying to pay with more debt, and deem it to ineligible for claiming as a negatively geared expense.

Is this logic correct and is my comment about the ATO deeming the action ineligible also correct?

 

[Xenia]

Not sure how to answer the ATO question, one for the accountants. But somewhere along the funding new properties with equity structure there needs to be an influx of cash as that structure can become unstable in a down market.

 

[MCS_80]

Sounds like a form of debt recycling. Many people do it and keep the ATO on their Christmas card list.

Cheers

Mick

 

[Rolf Latham]

Capitalising interest

Many say good to go

ta
rolf

 

[gooram]

Read this:

http://www.somersoft.com/forums/showthread.php?t=26532

 

[Terryw]

The ATO has released a Tax Ruling saying interest on interest retains the character of the initial borrowings.

 

[Rob G.]

The ATO has released a Tax Ruling saying interest on interest retains the character of the initial borrowings.

Of course you meant to say that compound (capitalised) interest is treated according to ordinary principles.

One consideration being the initial purpose, another being the actual current use.

Cheers,

Rob