Where do you put the $$$ from Equity?

[s050399b]

After pulling out some equity $$$ from existing PPOR Loan, where do you put it, so that the interest incurred by the equity loan is tax deductible?

All the $$$ from the equity pullout will be used for investing purposes, but before that happens, it has to be put somewhere?


Example,
Equity Pull out = $100,000
Purchase another IP = $50,000
Left $50,000 from the equity pull out

The money will be stored for future investing purposes, so that the interest is tax deductible. But before you have a use for it, where do you store it?

 

[BV]

can't you put it in the loan account and redraw it when you need it?
Can you convert that loan to a line of credit?

 

[Simon]

Don't draw it until you are ready to invest it.

Make sure the nexus is evident though.

 

[Bill.L]

Hi all,

The money will be stored for future investing purposes, so that the interest is tax deductible. But before you have a use for it, where do you store it?

Perhaps store it in an offset account?? WE have some there.

Then again we keep some borrowed funds in a trading account for shares, fully deductible there.

bye

 

[Qlds007]

If you set it up as a LOC then you dont need to strore it anywhere just utilise it when you need it.

 

[Indifference]

Don't draw it until you are ready to invest it.

Make sure the nexus is evident though.

Yes, yes, yes.... sound advice.

 

[Rob Williams]

I keep mine in an offset account. In fact, I have 2 offset accounts. One where I keep personal savings and another for equity realeases (or Cash Take-Outs as I call them).
That way, it's easy for me to keep track of and demonstrate in an audit where the funds have come from for investment and other purposes.
The money in the one account can only be used for investment purposes. The other can be used for personal expenditure.

 

[oracle]

I keep mine in an offset account. In fact, I have 2 offset accounts. One where I keep personal savings and another for equity realeases (or Cash Take-Outs as I call them).
That way, it's easy for me to keep track of and demonstrate in an audit where the funds have come from for investment and other purposes.
The money in the one account can only be used for investment purposes. The other can be used for personal expenditure.

Good strategy. But even if you have one offset account linked to a loan for investment purposes. Does it really matter if the offset account is used for personal expenses?

I can move funds in and out of the offset account but that still shouldn't affect the interest deductibility of the loan the offset account is linked to. Correct?

Cheers,
Oracle.

 

[Rob Williams]

Good strategy. But even if you have one offset account linked to a loan for investment purposes. Does it really matter if the offset account is used for personal expenses?

I can move funds in and out of the offset account but that still shouldn't affect the interest deductibility of the loan the offset account is linked to. Correct?

Cheers,
Oracle.

It's not the loan to which it's linked that's the issue, from my perspective. It's the source of the funds that's the issue for me. If I keep the funds combined in one offset account, then I have to keep careful track of the funds such that I can easily demonstrate that I have not used investment funds for personal purposes.

 

[Pa1nter]

I keep mine in an offset account. In fact, I have 2 offset accounts. One where I keep personal savings and another for equity realeases (or Cash Take-Outs as I call them).
That way, it's easy for me to keep track of and demonstrate in an audit where the funds have come from for investment and other purposes.
The money in the one account can only be used for investment purposes. The other can be used for personal expenditure.

I agree totally,works perfectly for me.
Each house has its own named account,100% offset with my own personal account.

 

[Terryw]

Rob is doing it properly.

If you borrow money and then put it in an account with other money it gets mixed up. If you then take some out to invest - which it is?

I remember a legal case, maybe Domjan??, where the person did this and the deductibility of the interest was denied as it was mixed with personal funds.

 

[s050399b]

Rob is doing it properly.

If you borrow money and then put it in an account with other money it gets mixed up. If you then take some out to invest - which it is?

What if I were to keep an excel sheet where it record the equity loan (in), deposit paid (out), and personal expenses (not tax deductible)?

Can it statisfy the audit requirements?

 

[dr.jauncey]

Hi, interest can still be apportioned when borrowed for mixed use. Each transaction would change the nature and percentage of borrowed funds so that could become quite complex over time.

Each repayment into the loan would need to be split per the overall percentages at the time of payment so you cannot simply pay off the non-deductible portion first.

Technically this should be done with an 'investment LOC' that is used for multiple properties, but most don't bother as the funds are purely investment use. That's more an allocation issue than a deductibility one.

 

[Terryw]

What if I were to keep an excel sheet where it record the equity loan (in), deposit paid (out), and personal expenses (not tax deductible)?

Can it statisfy the audit requirements?

I doubt it.
An analogy maybe something like urinating in a bucket of water and then saying you will only drink the water portion.

If you borrowing from a loan with mixed purpose then you can apportion the interest - but even this is less than ideal as if you make a deposit into this loan the deposit has to be apportioned against both parts, so you cannot pay down the non-deductible portion quicker.

 

[tess85]

I keep mine in an offset account. In fact, I have 2 offset accounts. One where I keep personal savings and another for equity realeases (or Cash Take-Outs as I call them).
That way, it's easy for me to keep track of and demonstrate in an audit where the funds have come from for investment and other purposes.
The money in the one account can only be used for investment purposes. The other can be used for personal expenditure.

Hi Rob, that was really interesting to read. Are both offset accounts offsetting the same loan, or different ones?

Just trying to work out how this applies to my situation... I have 3 offset accounts, 1 against the PPOR which is used heavily for personal reasons; and 1 offset account against each of the 2 IPs that aren't used at all. So if I were to release some equity from the PPOR, I could stash it in one of the offset account for the IPs. As long as every transaction is for an income-producing purpose, that would maintain the tax-deductibility of the extra equity loan against the PPOR? (the PPOR would one day be turned into an IP)

 

[Rob Williams]

Hi Rob, that was really interesting to read. Are both offset accounts offsetting the same loan, or different ones?

Just trying to work out how this applies to my situation... I have 3 offset accounts, 1 against the PPOR which is used heavily for personal reasons; and 1 offset account against each of the 2 IPs that aren't used at all. So if I were to release some equity from the PPOR, I could stash it in one of the offset account for the IPs. As long as every transaction is for an income-producing purpose, that would maintain the tax-deductibility of the extra equity loan against the PPOR? (the PPOR would one day be turned into an IP)

I have 3 loans with Homeside (NAB), each of which has an offset account.
I only keep personal and equity release funds separate so there is no "cross contamination". The last thing I want is to put $50k equity release into an offset, then pump $50k personal funds into the same offset, then go buy a speedboat and have the ATO audit me and tell me they deem the $50k I spent on the boat to be equity release funds and I can't claim the interest.

 

[tess85]

ahh, good to see I'm on the right track, had to read the thread a few times before I really got it. Makes it easier for my broker if I have at least some idea of the basics!

Don't you know a speedboat is a depreciating asset not an appreciating one?

 

[Rob Williams]

Don't you know a speedboat is a depreciating asset not an appreciating one?

Like I always say .. if you can drive it, if it floats or if you have to feed it, then it's not an investment.
But sometimes it's nice just to have something "because you can".

 

[tess85]

True that....... hubby wants one of the former (some car called the evo??) while I'm carrying one of the latter... after all, there's more to life than property investing!

 

[Rob G.]

Hi Rob, that was really interesting to read. Are both offset accounts offsetting the same loan, or different ones?

Just trying to work out how this applies to my situation... I have 3 offset accounts, 1 against the PPOR which is used heavily for personal reasons; and 1 offset account against each of the 2 IPs that aren't used at all. So if I were to release some equity from the PPOR, I could stash it in one of the offset account for the IPs. As long as every transaction is for an income-producing purpose, that would maintain the tax-deductibility of the extra equity loan against the PPOR? (the PPOR would one day be turned into an IP)

Ummm .... I suspect not.

The purpose of the equity draw on your PPOR is possibly not to generate income so the additional interest expense is not deductible.

By definition, an "effective" offset account will never produce any income because it is only arranged to set off interest expense on the linked loan.

The storing of that equity draw in an offset linked to an investment loan indirectly reduces your investment expenses, but does not actually derive your ASSESSABLE INCOME.

In fact even your taxable income won't be increased because you incur greater interest expense to try to reduce IP interest expense.

Now if you were arguing that this was a preparatory step in raising finance to purchase more investments soon, then you could argue Steele's case.

Cheers,

Rob