Taking equity out of an IP

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From: H T


Folks

Something I'm a bit confused about...

Say I have a property that I purchased at say 100k 2 years ago, ( with a 90k loan) and say its valued at 150k now. If I get it refinanced at 90% (.9*150=135k approx) on the new value and I put the money into my own residential property, can I now claim the additional 45k interest against the income on the investment property..
I realize if I buy another IP with the equity in the original Ip the money is a tax deduction, 'cause its going into an investment, but is the intention of what you want to do with the money the way the ATO looks at it or is it the asset that the equity has grown in that can be used to offset income??

thanks
HT
 
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Reply: 1
From: Peter Martin


HT,

Please take this reply as containing the usual "this isn't advice and I'm not an expert" type disclaimers ...

It's what you do with the money that counts from an ATO perspective. If you withdraw equity from an IP and use it to pay off a non-deductible debt such as your own residence the interest on the amount you withdraw is not tax-deductible.

Cheers,
Pete
 
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Reply: 2
From: Dale Gatherum-Goss


Hi

Pete's right. The ATO follow the money and what it is used for and so no, you will not get a tax deduction in the circumstances that you mention.

Having said that, what structure do you hold the IP in? That is, is the IP owned by you, by a company or a trust? The answer could change many things.

Cheers

Dale
 
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Reply: 2.1
From: H T


Thanks Dale

We have 4 ip's all owned by us. I know your an accountant - any suggestions as to which way we should go, company, trust..
They are all cash flow equal, and we have about 250k equity in them

HT
 
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Reply: 2.1.1
From: Dale Gatherum-Goss


Hi

The first problem that you have is that if you move the existing portfolio to a trust (my preferred structure) or a company, you immediately get caught by the evil twin sisters of doom, stamp duty and CGT.

This usually hurts too much to warrant the exercise.

However, if you decided to do so, the banks would lend the new entity the money to buy the property and the excess equity can be drawn down as a salary from the trust, amongst other things for your own needs. Or, using the equity to go again.

This is a perfect example of the need to think ahead and set yourself up properly before buying too much property.

I hope that this helps and I really do suggest that you give a lot of thought to where you are heading with your property portfolio in the future before making your decisions.

Good luck

Dale
 
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Reply: 2.1.1.1
From: Jim Lawrenson


A couple of years ago my wife and I used the equity in one of our IP's to purchase a run down property in need of refurbishment.

When the work was completed we sold the property for a healthy profit.

This money was used to pay off the mortgage on the marital home. The money "borrowed" form the IP was not repaid and we continue to gain tax relief from the interest repayments.

Should I fear a visit from the taxman ??
 
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Reply: 3
From: Dale Gatherum-Goss


Hi

It is very much the intention that matters. The ATO "follow the money" and if it was used to reduce your home loan - you would not be able to claim the interest as a tax deduction.

I hope that this helps

Dale
 
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Reply: 2.1.1.1.1
From: Dale Gatherum-Goss


Hi

Mmmmm, from what you wrote, yes, the ATO would not like you very much at the moment. You now face a decision:

Do nothing and hope for the best. Ignorance is no excuse either so pretending this won't help at all now.

Approach the ATO and admit to the error. This way, they cannot penalize you very much because you have brought the matter to their attention.

Start saving for that rainy day when the ATO do arrive and ask for the money.

As a professional, I have to advise you to get your facts straight and then approach the ATO yourself. They will be a lot easier on you.

I hope that this helps, and, good luck.

Dale
 
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Reply: 3.1
From: Sergey Golovin


If the ATO will come to your place, refinance it again and give'm amount of money they after back.

Serge.

I did not give you any hints.
I am not a professional accountant; I am only learning to be one.
And it might take me while to get there anyway.
 
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