Paying IP ongoing expenses from LOC

[danwatto]

Hi All,

What does the ATO think about investors claiming interest on a line of credit that is used to cover IP expenses?

The sort of expenses I'm considering are:
* Land tax bill
* Levies
* Rates
* Repairs
* Replacement dishwasher (capital?)

If I'm able to put all expenses onto a line of credit, it enables me to improve my cashflow which = being able to buy 2 more properties.

Note I'm intending to not put the rent into the line of credit - just to use the cashflow for more investing or personal spending.

The additional interest deductions would really help, but I know they frown on things like capitalising interest and claiming interest on interest.. but what about interest on expenses?

Thanks

 

[Peter_Tersteeg]

If you're careful about it, it can be made to work. I've got a couple of clients who do what you've described.

You do need a little discipline so you don't spend the LOC funds unnecessarily. You also need to consider how much having the LOC will reduce your borrowing capacity by.

 

[Rolf Latham]

A common strategy also used to debt recycle non deductible debt

Done the right way, the NPV of such a strategy where clients have a few IPs works a treat

ta
rolf

 

[Terry_w]

s 8-1 ITAA = expense incurred in producing assessible income

 

[bez23]

Do you need 1 LOC/split account for every IP?

 

[Terry_w]

Do you need 1 LOC/split account for every IP?

no need..........

 

[stumpie]

Hi All,

What does the ATO think about investors claiming interest on a line of credit that is used to cover IP expenses?

The sort of expenses I'm considering are:
* Land tax bill
* Levies
* Rates
* Repairs
* Replacement dishwasher (capital?)

If I'm able to put all expenses onto a line of credit, it enables me to improve my cashflow which = being able to buy 2 more properties.

Note I'm intending to not put the rent into the line of credit - just to use the cashflow for more investing or personal spending.

The additional interest deductions would really help, but I know they frown on things like capitalising interest and claiming interest on interest.. but what about interest on expenses?

Thanks

if i'm not wrong Terry W has posted on this approach previously, he called it a form of living off equity.

 

[danwatto]

Great, thanks guys.

Might set something up for this in the future.

 

[bez23]

I thought I have to keep all the expenses in separate accounts so the accountant can claim deduction of the interest against that IP. If they are all in a LOC isn't it too much work ?

Also if my PM has paid the invoice and deducted from the rent . Could I transfer money into my private account if I have the invoice of the same amount ?

 

[danwatto]

I thought I have to keep all the expenses in separate accounts so the accountant can claim deduction of the interest against that IP. If they are all in a LOC isn't it too much work ?

Also if my PM has paid the invoice and deducted from the rent . Could I transfer money into my private account if I have the invoice of the same amount ?

I think you're highlighting the downsides of this approach, on thinking about it more it may not be for me either..

* The complications at tax return time mentioned above - hard to aportion the interest between various properties for the return
* It requires me to stop my property manager from paying expenses - which means I will have alot more admin to do in paying expenses and invoices manually. Then what is the point paying the property manager.. not getting full value of the 6% paid to them.
* I don't have significant non-deductible debt to put my money towards, I don't have a PPOR loan.
* If I use my LOCs to do this, I have less to put towards a deposit on next property.

I think I will get more tax benefit from putting the LOCs as deposits on more property equaling higher negative gearing deductions from 5x loan amount if using 80% LVR.

May reconsider using this strategy at the semi-retirement stage when I'm looking to start LOE or paying down one property to use as a PPOR...

Interesting discussion anyway!

 

[srini]

To add to the OP's question, if I followed this method and got a lock changed at an IP for $100, I can then claim the $100 as an expense and also claim the LoC interest associated with the $100 drawn down from the LoC. Is that correct?

Feels like double dipping to me.

Thanks
Srini

 

[Terry_w]

I thought I have to keep all the expenses in separate accounts so the accountant can claim deduction of the interest against that IP. If they are all in a LOC isn't it too much work ?

Also if my PM has paid the invoice and deducted from the rent . Could I transfer money into my private account if I have the invoice of the same amount ?

1. no need to separate loans but when you do the tax you need to apportion expenses per property- should be straight forward.

2. No, you cannot reimburse yourself. Best to pay your own bills and borrow.

 

[Terry_w]

To add to the OP's question, if I followed this method and got a lock changed at an IP for $100, I can then claim the $100 as an expense and also claim the LoC interest associated with the $100 drawn down from the LoC. Is that correct?

Feels like double dipping to me.

Thanks
Srini

Yes. It is like buying a building. You can claim the interest and the depreciation of the asset.

 

[tess85]

Also to add the the OP's question... let's suppose a $20k LOC is used to pay IP expenses on 2 IPs. $10k has been used to pay IP1 expenses and $10k for IP2, so the LOC is now fully utilised.

If IP1 is sold (meaning the interest on the $10k expenses cannot be claimed anymore), can $10k cash be dumped into the LOC and the slate wiped clean for the funds that were used to pay IP1 expenses? Meaning that, after dumping the $10k cash back in, this frees up another $10k to pay IP2 expenses or other IP expenses. Just trying to get my head around it all including when situation changes eg. IPs are sold.

Thanks!

 

[Terry_w]

Yes thats right.. If an IP sold the interest on that loan is (generally) no longer deductible. Repayment of that loan should occur from the proceeds..

see para 17

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001

 

[tess85]

Thanks Terry, paragraph 17 was very helpful.

 

[bez23]

1. no need to separate loans but when you do the tax you need to apportion expenses per property- should be straight forward.

2. No, you cannot reimburse yourself. Best to pay your own bills and borrow.

With number 1, wouldn't that bit of hassle if you put in every small expense related to every IP and needing to aproportion the interest charge come tax time?

 

[danwatto]

With number 1, wouldn't that bit of hassle if you put in every small expense related to every IP and needing to aproportion the interest charge come tax time?

For sure. One of the reasons I think I won't do it for now..

I think it would need a LOC per property to be manageable long term, however that would seriously tied down a fair bit of equity that could be used better to buy more.