rental offset loan redraw ruling

[serrz]

Just to make sure I am not missing the point...

Say I have a investment property with a value of $1m, and loan of $800k (80% LVR), along with a proper offset account.

5 years later, I have $100k in my offset account. At that point, I go to my bank and draw down the additional equity of $200k on my property and place it in my offset account (as property is now valued at $1.3m). So essentially I now have:

$1.3m House value

($1m) Loan
$0.3m Offset account

Can I then subsequently withdraw the $0.3m, and claim interest deductions on the full $1m loan? What if I move this money $0.3m into my PPOR offset account?

 

[Peter_Tersteeg]

I wouldn't put the funds from the increase in the offset account, I'd leave it in the redraw for the loan. So you'd have:

Loan limit of: $1M
Redraw on loan: $0.2M
Funds in offset: $0.1M
Paying interest on effective loan amount of $0.7M

You can move the $100k to your PPOR offset account, if you move the $200k in redraw into an offset account (especially one against your PPOR), you will likely get into trouble.

 

[Terry_w]

Just to make sure I am not missing the point...

Say I have a investment property with a value of $1m, and loan of $800k (80% LVR), along with a proper offset account.

5 years later, I have $100k in my offset account. At that point, I go to my bank and draw down the additional equity of $200k on my property and place it in my offset account (as property is now valued at $1.3m). So essentially I now have:

$1.3m House value

($1m) Loan
$0.3m Offset account

Can I then subsequently withdraw the $0.3m, and claim interest deductions on the full $1m loan? What if I move this money $0.3m into my PPOR offset account?

The borrowing of the additional $200k is not related to any investment purpose so the interest on this portion of the loan will not be deductible.

You have also created a mixed loan. So that the loan is partially relating to the property and partially relating to something else - borrowing to park in a savings account.

Only 80% of the interest on this loan would be deductible at this point.
Also you could not make payments to the non deductible portion of the loan independent of the investment portion.

You have created a mess and lessened the deductible interest.

 

[Rolf Latham]

You have created a mess .

Perhaps dems simple words and all thats needed

ta

rolf

 

[serrz]

Ok thanks for clarifying. So in summary:

- the best way to manage mortgage debt is to keep all loans (whether investment or PPOR) as separate interest only loans with offset account attached to each loan. That way if you decide to move into a investment property and make it your PPOR, you can move all funds in your other investment property offset accounts into your now PPOR offset accounts, and maximise your tax deductions as offset accounts are treated as deposit accounts.

- when one draws down equity on a property, ensure that that equity is being used for investment purposes only, eg buying another investment property!

 

[Terry_w]

Ok thanks for clarifying. So in summary:

- the best way to manage mortgage debt is to keep all loans (whether investment or PPOR) as separate interest only loans with offset account attached to each loan. That way if you decide to move into a investment property and make it your PPOR, you can move all funds in your other investment property offset accounts into your now PPOR offset accounts, and maximise your tax deductions as offset accounts are treated as deposit accounts.

- when one draws down equity on a property, ensure that that equity is being used for investment purposes only, eg buying another investment property!

Well, ideally:

Interest only for all loans. (or PI for non deductible loan if you are a spender)

One offset account attached to the non deductible debt.

Use a LOC to access equity and to pay for investment expenses

Use a fee free credit card to pay for all expenses (carefully borrowing from the LOC to pay for all investment related expenses on the CC).

Once you have used a LOC to pay for a deposit etc then it may be worthwhile converting it to a IO loan to get a lower rate.

You should not draw down on a loan and park the funds in an offset account (for example to write a cheque).

 

[n0tme]

So if I deposit rent income into the offset linked to my PPOR, and only pay the monthly interest into the investment loan, why wouldn't the tax office challenge that structure with:

"we don't see any 'income' going into your loan, only the minimum to meet interest payment".

I would have thought we need to separate rental income from salary and therefore it's makes sense to deposit rental income into the offset link to the IP loan.

 

[Paul@PFI]

Experience

Terry - You have the patience of a Saint !!

I have 18 years tax experience and I'm never surpised by the absolute stupidity of some accountants. I privately believe that 80% of them shouldnt be practicing. Sure they can do a "I" return. Until it gets "complicated" by such awefully difficult concepts like tax deductibility. And in 80% of cases their client gets told the simple facts and then questions if I'm the one thats wrong....

Its not that fu$%&$g hard. He is also the same accountant who :
- Thinks a SMSF can buy the holiday house that Grandma owned for thirty years
- Thinks an ungeared unit trust breaches SIS...Cause its a related party.
- Thinks the refinancing pricinple in a unit trust is a tax scheme and warns against it. But he doesnt ring AMPs fund managers who borrow $$ all the time to fund operations and payout unitholders.
- Recommends a discretionary trust for property in NSW. Then someone mentions land tax so he changes his mind just before settlement and backdates a deed for a standard unit trust. Then gets surprised when land tax still applies anyway. THEN I get the phone call to fix it....which I can. But it would have been cheaper if he had used me first. But he didnt cause I wasnt doing a trust deed for $200 and a company for $600.

Its probably just karma smacking you for not using the best guys to help you.

I reckon I could offer a tax review service that reviews LODGED tax returns. If I find something missed I charge a fee and get 50% of the benefit. Find nothing and its free. Reckon its a money maker.

End of rant. PS I welcome any such reviews or new enquiries if anyone else is in this position. My clients are all over the world. Distance no problem.

For the original post have to ask the question I dont think anyone else has yet asked...Why would you park extra $$ in an offset on a rental prop loan?? It just lowers your tax deductions. It would be better paid into a offset on a NON_DEDUCTIBLE loan such as your mortgage or even your credit card if you have a balance.