Took the plunge, did I get the loan setup right?

Rixter, are you about? could you chime in from Geelong mate, i think you're using an LOC to pay interest and expenses and also having rental income credited to the LOC and capitalising the interest. is this correct?

Yeah I have a few LOC's used for Investing & Personal uses only.

All rents goes into them, with IP loan interest and expenses taken from them.

Any shortfall between rents going in and expenses including IP loan interest get capitalised onto the LOC balance for the month.

Depending upon what expenses fall due for that particular month, some months there maybe a shortfall and other months surpluses
 
Yeah I have a few LOC's used for Investing & Personal uses only.

All rents goes into them, with IP loan interest and expenses taken from them.

Any shortfall between rents going in and expenses including IP loan interest get capitalised onto the LOC balance for the month.

Depending upon what expenses fall due for that particular month, some months there maybe a shortfall and other months surpluses

Hi Rick

From memory that was what I remembered from your previous posts. Would you confirm if you have a private ruling on capitalising interest?
 
Hi Rick

From memory that was what I remembered from your previous posts. Would you confirm if you have a private ruling on capitalising interest?

Our accountant suggests it is Okay that way.

We are not doing it to debt recycle.

Our predominant purpose to keep deductible debt & non-deductible debt separate.

All rental income goes into the investment LOC's thus any monthly short fall that may occur capitalises secondary by default.
 
Our accountant suggests it is Okay that way.

Based on advice from clients accountants (on more than a few occasions) that I have witnessed I would be hesitant to trust advice via accountants 100% without sign off from the ATO.

In saying that your accountant may well be correct Rixter but still not convinced the ATO would agree???
 
Based on advice from clients accountants (on more than a few occasions) that I have witnessed I would be hesitant to trust advice via accountants 100% without sign off from the ATO.

In saying that your accountant may well be correct Rixter but still not convinced the ATO would agree???

I hear what you're saying Colin..having said that though, what my accountant suggests is inline with the ATO in what Terry W also states in his post above "ATO has said that if the dominant purpose is to capitalise interest so you can pay down the PPOR debt faster then they can apply Part IVA to deny the deduction".
 
I hear what you're saying Colin..having said that though, what my accountant suggests is inline with the ATO in what Terry W also states in his post above "ATO has said that if the dominant purpose is to capitalise interest so you can pay down the PPOR debt faster then they can apply Part IVA to deny the deduction".

What i outlined above was not actually to pay down any PPOR debt the money is actually in the offset and hence it is savings, does this change things?
 
I hear what you're saying Colin..having said that though, what my accountant suggests is inline with the ATO in what Terry W also states in his post above "ATO has said that if the dominant purpose is to capitalise interest so you can pay down the PPOR debt faster then they can apply Part IVA to deny the deduction".

Thanks Rixter.

To the brainstrust out there;
If you have a LOC with capitilising interest, either partial or full and have an IO with offset on your PPOR storing the difference in the offset then convert the PPOR to an IP can Part IVA be applied assuming you no longer reside in the PPOR?

The assumption being you do not disturb the original principal loan amount on the PPOR after its converted to an IP.
 
Yeah I have a few LOC's used for Investing & Personal uses only.

All rents goes into them, with IP loan interest and expenses taken from them.

Any shortfall between rents going in and expenses including IP loan interest get capitalised onto the LOC balance for the month.

Depending upon what expenses fall due for that particular month, some months there maybe a shortfall and other months surpluses

What if you have (as an example)

5 IP's and no PPOR

All 5 IP's have LOC's against them , however your primary LOC is against your first IP and thats where all rents go into and all expenses go out of

Is that okay?

You buy a 6th IP and after a year or two establish a LOC against the built up equity

Could you/Should you take that LOC out and put it into your 1st IP's LOC (either way you are paying interest)?

Or should you keep each IP and subsequent LOC seperate?

I suppose there are a number of questions above
 
What if you have (as an example)

5 IP's and no PPOR

All 5 IP's have LOC's against them , however your primary LOC is against your first IP and thats where all rents go into and all expenses go out of

Is that okay?

You buy a 6th IP and after a year or two establish a LOC against the built up equity

Could you/Should you take that LOC out and put it into your 1st IP's LOC (either way you are paying interest)?

Or should you keep each IP and subsequent LOC seperate?

I suppose there are a number of questions above

Not sure why you would be doing that, but capitalising interest is ok - interest on interest is deductible as long as the underlying interest is deductible. The problems arise when you are doing this as scheme to pay off non deductible debt faster and artificially creating a tax advantage.
 
Not sure why you would be doing that, but capitalising interest is ok - interest on interest is deductible as long as the underlying interest is deductible. The problems arise when you are doing this as scheme to pay off non deductible debt faster and artificially creating a tax advantage.

Terry, Is storing money in an offset account linked to a PPOR still considered by the ATO as reducing non deductable debt whilst allowing a LOC used for investment debt to capitilise, assuming the principal is never altered. LOC is secured against PPOR.
 
Terry, Is storing money in an offset account linked to a PPOR still considered by the ATO as reducing non deductable debt whilst allowing a LOC used for investment debt to capitilise, assuming the principal is never altered. LOC is secured against PPOR.

Yes, i think it would be. from memory I think there was an example of using an offset in that TR saying the ATO could apply Part IVA.
 
Yes, i think it would be. from memory I think there was an example of using an offset in that TR saying the ATO could apply Part IVA.

what if the LOC was NOT secured by the PPOR? would this 'link' between IP and PPOR change the context of the decision?

have a look at the very end of Julia's article about loan structures http://www.bantacs.com.au/capitalising-interest.php

What if instead of an LOC a variable loan is used instead, again this loan is not secured or linked to the PPOR in anyway?
 
what if the LOC was NOT secured by the PPOR? would this 'link' between IP and PPOR change the context of the decision?

have a look at the very end of Julia's article about loan structures http://www.bantacs.com.au/capitalising-interest.php

What if instead of an LOC a variable loan is used instead, again this loan is not secured or linked to the PPOR in anyway?

I don't think that changes things much. The only way to know is to apply for a private ruling. BTW, there are many private rulings where capitalising was allowed.
 
This above discussion is starting to go over my head. I get the gist of it, but it sounds like it could go pear shaped quite quickly if you're not careful.

Congratulations marty and good on you for going into IP1 with decent equity and substantial savings in offset acct behind you.
Many gen Y 'investors' rush into multiple IPs with 90/95% lvrs all within a short space of time. The initial amount you begin with can make a huge difference in your investment growth down the track.
Cheers and good luck

Thanks for the kind words!
 
update (almost) 1 year on...

I just wanted to provide an update on how this has turned out 1 year later.

Recap - IP purchased for $450k, borrowed all + stamps etc ($468k).
2 loans - $108k variable @ 4.44%, $360k fixed 5yrs ending Sep 2019 @ 4.89% (dang, fixed too early!)

Year to 30 June
Rent.......................$16,374
Int & Oth exp.........($23,089)
Cash loss..............($6,715)
Depn & Cap wks.......($5,521)

Net rental loss........($12,236)
Tax benefit..............$4,772

After tax cash loss....($1,944)

Comparable recent sales $530k-$540k, though one nearby went for an eye-popping $595k. Totally ridiculous IMO, but not complaining :)

I think I've done ok, made some equity, learned some lessons.

Shutting up shop though, have the capacity to buy a few more but gawd its getting insane looking around. FOMO panic buying all round. Scared to get the toes wet for more!
 
Great results, always nice to recap.

Why shut up shop completely? The market you're currently seems to be bit overheated, why not look to use equity and replicate in another market prior to the heat?
 
Tentatively looking at Canberra, but really have no clue about anywhere else. Not saying I'm not trying to learn though, but there's a pretty big knowledge gap. Sydney is starting to really scare me.

If hypothetically I were to buy another one, and with currently an almost fully offset PPOR loan of $250k I think the set up would go something like this:

If a new PPOR: Use offset cash for deposit, but borrow 80% and put remainder in another offset.

If a new IP, pay down current PPOR loan with offset funds and re-borrow with split loan. Though I reckon I've still got $75k equity on the PPOR available and $70k equity on the IP too... potentially could use that...
 
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