Refinancing Investment loan to purchase shares tax deductability

[MRGLEE]

Hi,

Scenario I am wanting to ask about is:

If I have a IP say I purchased for $500K with a loan of $400K, over a period of time the IP value has increased to $600K.

Now I want to refinance to pull this $100K gain out to realise this gain and buy blue chip shares (eg Comm bank share)

I hold the shares for 3 months then sell the shares making a little gain.

Question is will the interest on the $100K be tax deductible for the life of the IP loan?

Thanks.

 

[Paul@PFI]

No. Who cares what the loan security is.

The use of the proceeds is to buy shares. The interest would offset any share income. Your loan is a margin lending loan and nothing to do with IP. When you sell the shares the deduction stops so repay the loan. repeat process.

 

[willair]

Hi,

Scenario I am wanting to ask about is:

If I have a IP say I purchased for $500K with a loan of $400K, over a period of time the IP value has increased to $600K.

Now I want to refinance to pull this $100K gain out to realise this gain and buy blue chip shares (eg Comm bank share)

I hold the shares for 3 months then sell the shares making a little gain.

What happens over the 12 weeks the holding goes down,or into oblivion plus the entry exit costs eat into all the outcomes..

 

[redwing]

No. Who cares what the loan security is.

The use of the proceeds is to buy shares. The interest would offset any share income. Your loan is a margin lending loan and nothing to do with IP. When you sell the shares the deduction stops so repay the loan. repeat process.

Aren't you just setting up a LOC against the property, then drawing down on the equity funds to invest in shares - No Margin Call

Whereas Margin Lending would be borrowing money from a Bank using existing cash or shares as security - And subject to a Margin Call

 

[Paul@PFI]

I used the analogy that assumes shares remain constant. Of course if you buy outright on LOC there is no "margin call". But if shares drop you still take the loss (book or real doesn't matter). Its not any different from a ML loan...They just ask you to pay today for the loss. Both have same net equity.

 

[Dingus]

Isn't the OP asking about the deductibility of the interest on the purchase of the shares, which in this case, I would have thought you could get a deduction as the loan was used to purchase income producing assets?

 

[datto]

Isn't the OP asking about the deductibility of the interest on the purchase of the shares, which in this case, I would have thought you could get a deduction as the loan was used to purchase income producing assets?

I agree. I think that if you use that 100K to buy shares then the interest is tax deductable.

Furthermore, if you borrow 100K for the purpose of earning assessable income, and you invest say 50K to buy shares and leave then other 50K sitting in an interest bearing account (pending the purchase of more shares) then I would still think that all the interest paid on the 100K loan is tax deductable.

 

[Terry_w]

Question is will the interest on the $100K be tax deductible for the life of the IP loan?

Thanks.

How will the interest on the loan relate to the production of income after the shares are gone = No deduction.

 

[Terry_w]

Furthermore, if you borrow 100K for the purpose of earning assessable income, and you invest say 50K to buy shares and leave then other 50K sitting in an interest bearing account (pending the purchase of more shares) then I would still think that all the interest paid on the 100K loan is tax deductable.

I don't think it would.
If $50 is borrowed at 5% and invested at 3% there would be a loss and this would not be a commecial transactions. I think the deduction would be limited to the income earned.

 

[datto]

So then, the trick would be to try and earn more than 5% on your investment otherwise the interest deduction is limited ?

(my opinion only, not advice)