Tax implications of a refinance

I have just gone through my first refinance where also creating a new loan for investment purposes. Something for us less experienced property investors to be aware of is potential tax implications of refinancing investment loans.

Basically I had one IP with a loan with AMP. My investment partner has an unencumbered main residence. We refinanced the IP loan to ING Direct and mortgaged the main residence to create a loan for investment purposes. The old AMP loan had discharge fees and outstanding interest that were paid out using funds from the MR loan. This effectively capitalises interest on the IP, an arrangement that is potentially not acceptable to the ATO.

Now, I'm not trying to start an argument about whether all of the interest on the MR loan is deductible. Just that potentially it isn't and that I may need to work with the lender to reset all or at least part of the loan. Specialist tax advice required here.

Early in the process, I did discuss this with my mortgage broker and expressed an interest in paying out at least the interest using existing funds. However I didn't give him or the bank's lawyers anything specific in writing. I feel that I really should have given clear instructions in writing if I wanted things to happen a certain way.

My lessons learned:
1) get specialist tax advice about the tax implications of a refinance before structuring your loans
2) if you want something to happen during the process, give clear instructions in writing
3) if something goes wrong or you are uncertain about something, get specialist tax advice

This may or may not apply to you. Get specialist tax advice.

I know this all seems very obvious to experienced investors but it caught me out and I have been investing for a while. I thought I knew better.
 
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Sorry Perthguy, I cannot understand what you have done. You said there was a main residence which was unencumbered. So you used this as security and borrowed to pay the discharge fees and some interest. I don't really see a problem here.
 
Sorry Perthguy, I cannot understand what you have done. You said there was a main residence which was unencumbered. So you used this as security and borrowed to pay the discharge fees and some interest. I don't really see a problem here.
A more simple way of looking at it:
There was loan 1a against property A (an investment property)
There was property B (unencumbered)

Now there is loan 1b against property A
and loan 2 to purchase property B (investment property)

Funds from loan 2 were used to pay out discharge fees and interest for loan 1a.

At the very least at tax time, the interest expense from loan 2 will need to be split between property A and property B, which is a nuisance. There is also a question if the interest accrued on loan 2 is deductible to the extent it was used to pay interest on loan 1a.

I didn't want the funds from loan 2 to go towards loan 1a at all. I had funds set aside to discharge loan 1a.
 
I don't see much of a problem. Loan 2 will be for 2 different properties and the interest can be apportioned easily enough if both are IO. At some future point just refinance the bit relating to the first property by borrowing against the first property and paying this off.
 
I don't see much of a problem. Loan 2 will be for 2 different properties and the interest can be apportioned easily enough if both are IO. At some future point just refinance the bit relating to the first property by borrowing against the first property and paying this off.
Blah. I hate apportioning interest. I have a strict one property one loan policy :D

It's not much so I am planning to just pay down the amount onto the loan and redraw it as new borrowings to put into property B. I like the recording keeping better for one loan, one property. :D

Thanks for taking the time to comment though. Your inputs into this forum are invaluable!
 
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