Repaying yourself...

[Owen]

I have a friend (who is a lurker here and won’t ask her own questions) who has a situation with an IP so I thought I would ask a question on her behalf.

She purchased an IP last year and put up 20% of her own cash as deposit plus the associated costs and borrowed the remaining 80%. She did this despite the fact that she had a large, unused LOC secured against her home!!! The main reason was to make the cashflow appear better than it was (but that’s another thing entirely). The property is in her personal name and she is claiming all costs and the interest of the 80% loan against rent and her personal income.

The question is – is it possible for her to write herself a cheque from the LOC to repay the ‘cash’ she provided for this investment and then claim the interest on this amount? In this way borrowings for the IP would be increased to 105% and she would claim all of this interest against income. There is no non-investment debt in the LOC to muddy the calculations.

A long shot but I guess it is effectively refinancing yourself – or something like that….

 

[skater]

I'd say to check with your accountant. I do just that on most of my purchases, however I reimburse myself as soon as property settles.

 

[sbe]

Good question.

If you haven't done a tax claim yet (ie, it's this financial year she bought), it's probably easier than if you've already done a tax return on it.

Good question for the accountants onthe forum me thinks.....

Of course, I avoid this situation by having no cash

 

[see_change]

My thoughts on this are that it depends on what structure you buy the IP in.

If she has bought the IP in a trust she has done one of two things.

• She has either given her trust a gift, in which case she can't do anything about it at this stage.

• then she has effectively loaned her Trust the money. If this is the case she can draw on her LOC so her Trust can repay it's first loan with funds from the LOC. Effectively refinancing. It is my understanding that in this case she can claim the interest on the LOC money as a tax deduction. If she has done this , it would be a good idea to actually draw up a loan document to officially document the loan so the ATO don't dispute things in later years.

If she owns the IP in her own name then I don't think that it can be done. To my way of thinking this would similar to a situation where you are converting a PPOR into IP status. In this situation you can only claim as deductible the interest on any residual loans that were applicable to the property as an IP.

The other option she can do is refinance the property so she can redraw the equity that she has put in ( and from subsequent capital growth ) , and when she redraws it to purchase further properties , it then becomes deductable.

Is that correct Dale ?

See Change

The usual disclaimers , I'm not an accountant , please seek the advice of a properly qualified accountant.

 

[Owen]

What SC described is bascally how I described the situation to my friend. I hadn't related it to "turning your own home into an IP" scenario though but I guess the comparison rings true.

Can you confirm SC's answer or add some other comments if not right please Dale? Her accountant has told her it is "probably" possible. Not too definite!!!