Regearing when needed

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From: Jason Prestwidge


Has anyone tested the method of re gearing an IP every couple of years to take advantage of the capital gain as it comes, to help pay down the mortgage over your residential property?

For example; Say you own a home with a loan of 250K and an IP with a 220K loan.
After say three years we re value the IP at 250K so we re-borrow 100% of the value of the IP, we then pay down the home mortgage with the 30K funds, thus reducing our non tax deductible debt and increasing our tax deductible debt.

Presto
 
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Reply: 1
From: Duncan M


The amount you re-borrow to repay your home mortgage will NOT be deductible.

Duncan.
 
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Reply: 1.1
From: Mark Noonan


Hi Jason,

It's not the asset that determines the tax deductibility of the loan interest. It is the purpose the money is used for which determines that.i.e an investment purpose - ok, non investment purposes - not ok.

Paying off your personal debt isn't an investment purpose. I'm pretty sure that's how it works.

Cheers,
Mark.
 
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Reply: 1.1.1
From: Shaun Wilkeson


Hi Jason and others -
pls correct me if I'm wrong, one method you might be able to use to pay down non-deductable debt might be to borrow against the IP to pre-pay the next years interest. Thus with the interest component of your outgoings out of the way, the entire rent you receive can be used to pay down your ppor mortgage.
The additional borrowings, being used against the IP should remain deductable, but you IP debt will increase - over time moving the debt from ppor to IP (non-ded. to ded.)
always ready to be corrected
ShaunW
 
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Reply: 1.1.1.1
From: Duncan M


This sounds awfully like a loan product that the ATO has shut down that
effectively allowed the borrower to capitalise interest and use yield to
reduce personal debt.. I dont recall the ruling or names etc..

Great thinking though :)

Regards,

Duncan.
 
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Reply: 2
From: Dee Mee


2 questions
if u refinance - u get the 30k or so out in cash
even if u repay, shouldnt the interest still be deductable. I understand if u took a line of credit and used the money for the home loan then its not deductable, but what if u refinanced the whole ip loan as 1 loan. shouldnt it all be deductable .

2nd question
who says u cant take the money and buy 30k of shares. hold on to the shares for one or two months. because it is for shares then the money is deductable. but then u sell the shares and put it into the homeloan. when they ask u where u get the money from, u say im selling some shares... .whats wrong with that???
 
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Reply: 2.1
From: Steve Navra


Some great ideas mentioned above!

Draw down the equity from your IP, the purpose of this loan being for investment.

Buy a cashbond for extra serviceability so as to allow the acquisition of the new investment/s. Apply for a directive from the ATO, justifying in advance your purpose. Repatriate the funds from the casbond into an account that is offset against your non-deductible debt. (Mortgage on PPOR)

You won't have paid down your non-deductible debt, but you will effectively have cancelled it out it with the matching offset interest.

Note 1: This is better than actually paying down the PPOR mortgage, because you would only have to set up a new loan facility again if you wished to use this paid down equity.

Note 2: We have experienced no difficulty at acquiring the tax directive for the above mentioned structure.

Regards,

Steve
 
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Reply: 2.1.1
From: Rolf Latham


HI Steve

Problem is those buggers ALWAYS change their mind when more than a minority of people use these adavanced systems so shhhhhhhhhh.

Ta

Rolf
 
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Reply: 2.2
From: Dale Gatherum-Goss


Hi Dee

On 3/21/02 3:06:00 PM, Dee Mee wrote:
"2 questions: if u refinance - u get the 30k or so out in cash even if u repay, shouldnt the interest still be deductable. I understand if u took a line of credit and used the money for the home loan then its not deductable, but what if u refinanced the whole ip loan as 1 loan. shouldnt it all be deductable."

No, the tax office have a policy of "following the money" therefore, if you refinance your IP and use some of the funds for personal reasons, they will not allow all of the interest as a tax deduction. This is a common misunderstanding.


2nd question: "who says u cant take the money
and buy 30k of shares. hold on to the shares for one or two months. because it is for shares then the money is deductable. but then u sell the shares and put it into the homeloan. when they ask u where u get the money from, u say im selling some shares....whats wrong with that???

OK, the interest on the $30k would be then tax deductible whilst you were using the funds to generate income. That is, whilst you own shares. However, at the point of selling the shares and placing the funds in the homeloan, you would lose the ability to claim interest as a tax deduction on that money because the funds are now used for private purposes.

I like the way you're trying to make something happen, but, no cigar this time, I am afraid!

Have fun

Dale
 
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Reply: 2.2.1
From: Brian H


Steve
Forgive me if I am wrong,But I assume you did not tell the Tax office that you were placing in a cash bond at first and then placing it in a offset account against your mortgage.In a audit do you think they will not be concerned about this.They could say that you could arrange a LOC which would not be charged interest until you drew down the money and the only reason for doing this structure would be to reduce non tax deductible interest into deductible interest.I do understand the reason you put forward to increase cashflow for properties.I have to tell you that I have been caught by a tax effective investment before that some people had rulings from ato only to have them revoked.Sorry about the negative vibes but I don't want to see anyone hurt.Would love to hear your thoughts Dale.

Regards

Brian
 
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Reply: 2.2.1.1
From: Steve Navra


Hello Brian,

The ruling applied for very specifically (about 5 pages specific) states that the purpose of the loan is to purchase an income stream for serviceability, without which the new investment could NOT be obtained. It is on this basis alone, that the deduction is allowed. The ruling further spells out that where sufficient serviceability pre-existed, then the deduction would NOT apply.

It is a clear cut situational ruling.
However you wish to spend the dollars thereafter is your prerogative: - for lifestyle, holidays, buying shares, paying off a mortgage is NOT the issue.(After all it is your own CAPITAL that you are spending)

I take your point about rulings being changed from time to time, hence we suggesting that each client (In conjunction with their accountant) applies for an individual ruling. Again, to date all applications have been successful. I guess it comes down to being up front and transparent with the ATO.

Lastly, the benefits of the extra serviceability far outweigh the amount of deduction obtained. In practice then, the fact that an amount of tax efficiency is obtained, remains just a (welcome) bonus.

Hope this helps.

Regards,

Steve
 
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Reply: 2.2.1.2
From: Dale Gatherum-Goss


HI Brian

It does sound good, doesn't it. Almost too good at times . . .

I'm afraid that I don't know enough to comment properly. Steve's stuff is normally pretty good and I know that he is thorough, therefore, providing all necessary steps are taken to protect yourself, you should be fine.

As always, if you don't like the concept, don't play.

You are right about the tax office though and an audit can be very uncomfortable. It's a little bit like having a proctologist examination, only worse!!! Or so I'm told.

Dale
 
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Reply: 2.2.1.2.1
From: Rolf Latham


Hi Dale

Going on from that I have heard an interesting defintion of a tax auditor.

Someone that goes around to stab the wounded after a battle.

PS A proctologist wears gloves.

Rolf
 
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Reply: 2.2.1.2.1.1
From: Brian H


Thankyou Steve,Dale

I Have no doubt about your expert opinion Steve,from what I have read in the last couple of month's.I JUST DON"T TRUST THE TAX OFFICE.I live and learn by what everyone writes not to mention that it is much appreciated.

Kind Regards

Brian
 
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