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.
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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