Using equity -tax question



From: David Beattie

Hi guys
I have been rearranging my finances and I could do with some assistance.
Current situation is that I have 2 IP's mortgaged together and my home mortgaged separately. Now with my Ip's they have had capital growth and I plan to use some of that equity and move it to my non tax deductible home.
My question is this as I am increasing my borrowings for my IPS ( and reducing my own home loan)can I claim a tax deduction for the increased borrowings or can I only claim on my original loan.
IF I can only claim on my original borrowings how would I determine what was new borrowings and what was old

I hope this makes some sense???
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Reply: 1
From: Michael G


Deduction of interest is based on the PURPOSE of the loan not the SECURITY of the loan.

That is, borrowing from your IPS to use the money for your home is not deductable because the PURPOSE of the loan is to pay off your non-investment property.

Whereas if you were to borrow from your home to buy an IP then that loan would be deductable because the PURPOSE of the loan would be to buy an income producing asset.

Michael G.
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Reply: 1.1
From: Steve Piggott

This always comes down to buying in the right name or entity. The only real reason to have a home in your own name is so you can sell and realise CG without the CGT.
However no matter what name your principal place of residence is in ... its a matter of tax law interpretation as to whether you can dodge CGT.
Ok heres a way your IP's equity can reduce your home. Use of corporate structures are paramount. Only purchase a house in a company. Live in the company house... pay rent according to market rental. Any other IP's can have equity drawn down to pay off or refurbish company house for rental purposes. Eg furnishings... swimming pool fencing ... retaining walls... any thing that's on the allowable dep schedule.
As a director of your own Co. you have a lot more flexability... and far more tax advantages.
Incidentally... if you use a LOC and pool the mortgages... you can consolidate your total property equity... draw it down thru LOC and distribute as directors fees.... tax free $$$$$. Just make sure you dont spend more than the CG factor.
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Reply: 1.1.1
From: Richard Hughes

I had the understanding you could increase the loan for the IP and take out the cash for what ever purposes.
This idea is the mantra of "The Investors Club" who call this "harvesting" where you increase the values of the loan again an IP, but you are effectively draw cash out from a LOC type loan.
It certainly depends on how your loan is structured, and that might be the over-riding factor.

Certainly, its worth trying to find out more from your bank.

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From: Dale Gatherum-Goss


Yes, I have heard that too, but . . .

You can redraw money against the valuation of your property. The banks will allow you to do that, but, unless you use that money to generate an income, and not to live off it, then the Tax Office will not allow you to claim the interest on that redraw part of the loan.

I hope that this helps.

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From: Terry Avery

Hi RH,

As Dale says you can access the equity because the bank will let you draw
upon it. The important point is that the ATO will not allow any deductions
for the extra interest you will pay. My calculations, based on my
understanding of hoe the Investors Club method works, is that the interest
payments grow faster than the drawdown of the equity so you actually have a
diminishing income stream and a growing debt. You are living off your
capital gain and there is no allowance for the time when you sell a property
and then have to find the capital gains tax so you are in a position of a
tax bill, no profit to pay it because you lived off your capital gain. The
idea is to never sell and leave that problem to your heirs.

If you are having trouble seeing this think about this example. You buy a
median priced house for say $100,000. Over time you draw down the equity in
the IP at say 80%. The house increases in value to $500,000 so your loan has
been increased over the years to $400,000. Due to failing health (you will
get old) you need to sell the house. You sell the house for $500,000 and
repay the loan of $400,000 leaving you with $100,000. Your capital gain was
$400,000 ($500,000 - $100,000). Your tax liability will be $188,000 but you
only have $100,000 gain to pay the bill so you have to find $88,000 from

Hopefully you can see that selling the house is going to be detrimental to
your financial health, hence the never sell part of the plan. To my mind the
Investors Club plan is a disaster waiting to happen. You will be placed in a
situation where you cannot afford to sell, ever!! You will then lack
flexibility as the economic situation changes.

My solution? Use the equity to invest in income producing assets, not
lifestyle. Then the interest is tax deductible.

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Re: Using equity -tax question - Oops

From: Terry Avery

Oops, the CGT I calculated in my example should have been $94,000 (forgot
the 50% discount for individuals) therefore leaving $6,000 profit. By the
time you pay for sale costs you won't have any money from the property. I
think that would be the best case scenario, in the worst case you would end
up owing the bank or the taxman.
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Re: Using equity -tax question - Oops

From: Chris Legg

Your sales costs would have reduced the capital gain so in your example you would have probably broken square.
If the property has increased by a factor of 4 then presumably your rents would have increased also so part of your retirement income would be coming from increased rents This would eliminate the need for you to draw down to 80%.

A 60% Equity drawdown would eliminate your problem.

I would also have thought that lenders would apply some serviceability criteria based on your rental income at the time and not just on your increased equity.

Rod could you please comment on this style of retirement plan.

"Politicians substitute activity for achievement"

Sir Humphrey in Yes Minister

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Re: Using equity -tax question - Oops

From: Terry Avery

Yes I factored in an increase in rents which would cover the increase in
interest payments. I did it as a mental exercise and did not take into
account the bank's serviceability criteria. The Investor Club plan is to
retire and live off the drawn down equity so you are totally rent reliant in
servicing your loans. The other item I factored in was the Average male
weekly wage which is the recommended draw down rate. I used this rather than
80% or 60% LVR in my model and after 18 years you ended up owing more
interest than rent coming in. The banks would probably so no way a lot
earlier than that. My basic point is that I can't see how the IC plan is
sustainable beyond a few years, plus they say you can keep borrowing to buy
more properties. A sort of perpetual money machine. I'm all for the latter
but I just can't see how they can legally do it. Maybe this square is too
big for me to think outside of....

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Re: Using equity -tax question - Oops

From: Chris Legg


Would you please comment on Investor Club type retirement plan?

Would any financier just keep letting you increase LOC with increased equity with rents only covering increased interest?

Lifes a beach at Caves

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Re: Using equity -tax question - Oops

From: Rolf Latham

Hi Chris

I do avoid making specific comment where I can about particular organisations. It would not be fair to pass judgement without without detailed research.

Generally speaking then, unless you get 10 % ++ return the rent will NOT cover the serviceability in most cases. See my post earlier this week on this topic.

In addition I am not a big fan of LOC type products in more than half of cases.


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