Using an existing LOC (drawn) for buying shares - Deductability

Hi All,

I think I've got myself in a bit of a twist on how to maintain deductibility on a LOC while moving between asset classes. A classic case of acting before thinking it through!!

Situation is (round numbers):

Existing IP - Purchase Price $1m

80% Lend with 3 IO splits ($700k) and 1 LOC ($100k) - all 4 facilities totally drawn down at settlement for maximum deductions. No PPOR so offset account against one of the IO loans holding cash, rent, salary, etc - approx 100k. With cash in the offset, after all depn, property is +ve about $7k per year.

I'm not looking to buy another IP...but I would like to move the cash from the offset into shares to bring the property to neutral(ish) to manage the tax liability and keep deductibility.

There is a chance the IP will become a PPOR in the future so the initial $800k would no longer be deductible. I understand I can recycle the debt by paying into the splits and redrawing for further investments - shares, IP expenses, IP deposits, etc.


My Question:

Can I partially pay off the LOC and then draw for the shares, eg 30k? I'm thinking not, it would make the $100k LOC split purpose and ruin the deductibility if I did move in to the house.

If (hypothetically ;)) I've already paid $30k into the LOC and then drawn $10k for a share purchase - what is the best way to rectify?

1. Finish purchasing the remaining $20k of shares? --- No change to mixed purpose, but fix cashflow.
2. Move cash from the offset to LOC to bring the balance to $0 and start again? --- Lose deductibility of the initial $10k.
3. Leave the LOC at $80K and start paying it down slowly, if I reach $0 before the IP turns to PPOR, I'm fine? --- No change to cashflow, but fix deductibility.

I think option 2 is probably the most flexible, but wanted to check with the wise people of SS!

I may have to wear the lost deductions on the $10k. Unless I sell and re-buy the shares once the LOC is at $0 (will have to look at price movements and brokerage vs interest rate to see if that is worth it).

Like I said - A classic example of looking at the shares and acting too quickly without thinking it all through. Hope this may provide others with a warning if they are impatient enough to do the same!
 
First things first will the shares be income producing? Ie pay a dividend?
2ndly the purpose or use will determine deductability of loc not security.
 
Hi Myhillg

If I understand correctly you have a $100,000 LOC loan which has a $100,000 limit and $100,000 owing. All this loan relates to the purchase of the current property so the interest should be deductible as is.

You also have $100,000 cash. You could use this cash to buy shares. If you did this the interest payable on the property would increase and this increased interest would be deductible against the property.

Alternatively you could pay $100,000 into the loan so the balance becomes nil. You then borrow $100,000 (or less) for the shares. As long as the shares are income producing the interest should be deductible.
Assuming both shares and property will be in the same name there should be no immediate tax difference if you did either of the above.

But if you intend to live in this property later it may be better to use the second method and that could increase your tax deductions once you live in the property (as you will still be able to claim the interest on the shares).

However, you are talking about partially paying down the LOC. If you do this it will create a mixed purpose loan. At the moment this should not really be a problem as the interest on the loan associated with the property would be deductible as would the interest on the part associated with the shares.

But since you have paid $20,000 off the loan at the moment $80,000 of the loan is associated with the property and $20,000 associated with the shares (20%). Therefore if you paid another $20,000 into the loan then 80% of this deposit will come off the $80,000 part associated with the property and 20% will come off the 20% associate with the shares.

You should split the loan before making any further deposits and then you should pay off the property portion independently.

If you sold the shares you would have about $20k and if you put this into the loan as a deposit you would end up with a similar problem ? as it is mixed you wouldn?t be able to pay off just the share portion but would pay off the property portion as well.
$20,000 x 80% = $16,000.
You would be reducing the $80,000 loan associated with the property to $64,000. So you would have an $80,000 loan but only the interest on $64,000 of that loan would be deductible.

You should probably either do the following
1. Pay the whole $100,000 off, sell the shares (keeping in mind timing and tax), and then borrow and buy more, or
2. Contact your broker and split the loan now. ATO allows a mixed loan to be unmixed like this. Once split then you can pay off the relevant portion and then borrow to buy more shares. If you are on a professional package you should get a free variation each year. It should be pretty easy to do.
 
yes - shares will be income producing but with franking and smaller div yield it should help manage the tax liability.

Sounds like should pay down the LOC completely and then draw for any other uses. I will also sell and re-purchase the parcel of shares that were recently purchased.

The cost of brokerage will be the price of this lesson!

Thanks all
 
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