Brilliant analogy for co-mingling of funds.
Why didn't the ATO use this example in TR2000/2 ???
Cheers,
Rob
Where do you put the $$$ from Equity?
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Brilliant analogy for co-mingling of funds.
Why didn't the ATO use this example in TR2000/2 ???
Cheers,
Rob
Hey guys
all very good advice. tx
Wonder if you could pls help me out with a predicament..
On a similar note, Would the ATO see an issue with the following scenario..
I have 1 IP loan (currently principle and interest - which i will change to interest only) and it has a corresponding offset account. There is $ in the offset account but there is also a bit of $ in the equity account (long story of why its in there vs in the offset account)
I bought a 3 bedroom house on the weekend as my PPoR but I will need to convert one of those rooms into a home office as i am self employed.
I understand that once you have drawn/paid down an investment loan you cannot redraw that equity for personal use and still claim the resulting increase in interest.
So my question is can I redraw that equity in my IP loan to pay for a percentage of the new PPoR/Home office loan?
Ie I estimate the home office percentage will be around 20% of the house.. so could I then calculate 20% of the home loan cost and then take that money out of the IP loan and then be eligible to claim that interest?
Any help would be appreciated!
ta
paul
equity
all very good advice. tx
Wonder if you could pls help me out with a predicament..
On a similar note, Would the ATO see an issue with the following scenario..
I have 1 IP loan (currently principle and interest - which i will change to interest only) and it has a corresponding offset account. There is $ in the offset account but there is also a bit of $ in the equity account (long story of why its in there vs in the offset account)
I bought a 3 bedroom house on the weekend as my PPoR but I will need to convert one of those rooms into a home office as i am self employed.
I understand that once you have drawn/paid down an investment loan you cannot redraw that equity for personal use and still claim the resulting increase in interest.
So my question is can I redraw that equity in my IP loan to pay for a percentage of the new PPoR/Home office loan?
Ie I estimate the home office percentage will be around 20% of the house.. so could I then calculate 20% of the home loan cost and then take that money out of the IP loan and then be eligible to claim that interest?
Any help would be appreciated!
ta
paul
equity
Thanks Rob G for the clarification. I guess it's much simpler and neater to only get the equity out when I need it then, ie. as deposit for the IP... rather than to get the funds out in advance and have them stashed in an offset?
paul, what does your accountant say to that one?
I am yet to clarify with him this scenario.
I have had a few discussions with him about the fact that I cannot simply redraw the entire amount from the IP account to finance and reduce the mortgage on the home loan but i have not clarified with him the fine details of using a percentage for the home office. I will talk to him today and let you guys know.
One other option which I would like to investigate is the possibility of refinancing the entire IP loan - say up to 80% and then using the excess $ for the home?
Would that be a viable solution...
tx again
Paul
Hi Paul
Just think of redraws as borrowing money afresh. So every time you will be taking money from a redraw you will be making new borrowings. The interest on this portion of the money borrowed will only be deductible to the extent that it is used for business or investment related purposes.
It can get complicated where you are mixing a loans
Since you are going to be buying a new PPOR then the interest on this loan is not normally deductible. If you were to take the deposit from your existing loan then the interest on this portion redrawn is not normally deductible.
But your matter is different because 20% of the property will be income producing. Basically this means you can claim 20% of the interest of any loans used to purchase that property.
Now with your redrawn amount, since only 20% of the interest on the property is claimable only 20% of the interest on this amount would be claimable. That is going to make things very messy when trying to work out interest portions.
There are also cgt implcations - you will probably lose the CGT exemption on the portion of the place that you rent out. So estimate if it is worth claiming the interest in the first place - small savings, large hassle and possibly large future CGT issues.
Just think of redraws as borrowing money afresh. So every time you will be taking money from a redraw you will be making new borrowings. The interest on this portion of the money borrowed will only be deductible to the extent that it is used for business or investment related purposes.
It can get complicated where you are mixing a loans
Since you are going to be buying a new PPOR then the interest on this loan is not normally deductible. If you were to take the deposit from your existing loan then the interest on this portion redrawn is not normally deductible.
But your matter is different because 20% of the property will be income producing. Basically this means you can claim 20% of the interest of any loans used to purchase that property.
Now with your redrawn amount, since only 20% of the interest on the property is claimable only 20% of the interest on this amount would be claimable. That is going to make things very messy when trying to work out interest portions.
There are also cgt implcations - you will probably lose the CGT exemption on the portion of the place that you rent out. So estimate if it is worth claiming the interest in the first place - small savings, large hassle and possibly large future CGT issues.
Thanks Terry,
Ok so good point on the fact that 20% of the home loan begin deductible.
That seems to be the least complicated structure..?
ie
1. Switch my existing IP loan to interest only and claim interest deductions as usual
2. Claim 20% of the home loan interest as a deduction until we've paid that off...
Do you have any thoughts on my question of refinancing the IP loan to effectively start from scratch and therefore being able to utilise all the the equity that is currently residing in the IP loan?
tx
Paul
Ok so good point on the fact that 20% of the home loan begin deductible.
That seems to be the least complicated structure..?
ie
1. Switch my existing IP loan to interest only and claim interest deductions as usual
2. Claim 20% of the home loan interest as a deduction until we've paid that off...
Do you have any thoughts on my question of refinancing the IP loan to effectively start from scratch and therefore being able to utilise all the the equity that is currently residing in the IP loan?
tx
Paul
Thanks Terry,
Ok so good point on the fact that 20% of the home loan begin deductible.
That seems to be the least complicated structure..?
ie
1. Switch my existing IP loan to interest only and claim interest deductions as usual
2. Claim 20% of the home loan interest as a deduction until we've paid that off...
Do you have any thoughts on my question of refinancing the IP loan to effectively start from scratch and therefore being able to utilise all the the equity that is currently residing in the IP loan?
tx
Paul
Ok so good point on the fact that 20% of the home loan begin deductible.
That seems to be the least complicated structure..?
ie
1. Switch my existing IP loan to interest only and claim interest deductions as usual
2. Claim 20% of the home loan interest as a deduction until we've paid that off...
Do you have any thoughts on my question of refinancing the IP loan to effectively start from scratch and therefore being able to utilise all the the equity that is currently residing in the IP loan?
tx
Paul
Yeah I plan on living there for the forseeable future..
Sorry to sound like a broken record but can anyone see a way of utilising my equity to pay off my non-deductible home loan whilst being able to legitimately claim the interest off the IP loan?
Im think Im still a little unclear about the implications of refinancing.
Ie Doesn't refinancing a loan mean that you take out a brand new loan with new terms, conditions and loan amount - so you would discharge the current loan, and then take out a fresh new loan for 80% of the property?
tx again
paul
Sorry to sound like a broken record but can anyone see a way of utilising my equity to pay off my non-deductible home loan whilst being able to legitimately claim the interest off the IP loan?
Im think Im still a little unclear about the implications of refinancing.
Ie Doesn't refinancing a loan mean that you take out a brand new loan with new terms, conditions and loan amount - so you would discharge the current loan, and then take out a fresh new loan for 80% of the property?
tx again
paul
Yes, a new loan could be taken out - but the important thing is what will the funds be used for? Sounds like you want to borrow extra to pay off personal debt too.
Have you considered setting up a LOC and borrowing to pay all investment expenses, including interest? This will free up cash to pay into your home loan. You should get proper advice about setting this up before you begin. Probably good to get a private ruling from the ATO too.
Have you considered setting up a LOC and borrowing to pay all investment expenses, including interest? This will free up cash to pay into your home loan. You should get proper advice about setting this up before you begin. Probably good to get a private ruling from the ATO too.
Thanks for your replies Terry,
No I dont want to borrow extra to pay off personal debt.
I just want to be able to use my equity (to pay off my home loan) which was wrongly deposited into the ip loan and not the offset account.
So id be happy to just have a new IP loan at 50% of the current valuation..?
I feel like Im starting to make less and less sense?..
Also - how do you go about getting a personal tax ruling?
tx again
paul
No I dont want to borrow extra to pay off personal debt.
I just want to be able to use my equity (to pay off my home loan) which was wrongly deposited into the ip loan and not the offset account.
So id be happy to just have a new IP loan at 50% of the current valuation..?
I feel like Im starting to make less and less sense?..
Also - how do you go about getting a personal tax ruling?
tx again
paul
The question is, then, do you want to borrow extra funds to pay off personal debt?
If the answer is yes, then you cannot claim interest on that portion.
When you deposit money into a loan it is a repayment, when withdrawing it it is new borrowings. So even if you have temporarily parked money into a loan you cannot claim the interest on this money if you redraw it unless the new use of the money was for investment related purposes.
eg You have a $300,000 loan, and pay it down to $200,000. It is an investment property. $100,000 is available in redraw so you withdraw this to pay for teh deposit on your new PPOR. Your total loan is $300,000, but you will only be able to claim the interest on $200,000 as $100,000 was borrowed for private use.
Your accountant should be able to get you a private ruling.
If the answer is yes, then you cannot claim interest on that portion.
When you deposit money into a loan it is a repayment, when withdrawing it it is new borrowings. So even if you have temporarily parked money into a loan you cannot claim the interest on this money if you redraw it unless the new use of the money was for investment related purposes.
eg You have a $300,000 loan, and pay it down to $200,000. It is an investment property. $100,000 is available in redraw so you withdraw this to pay for teh deposit on your new PPOR. Your total loan is $300,000, but you will only be able to claim the interest on $200,000 as $100,000 was borrowed for private use.
Your accountant should be able to get you a private ruling.
Yep, I understand the eg.
But further to this, Could you then discharge that loan by refinancing - starting a new 30 year term period etc and taking the IP loan back up to $300,000?
refinancing is replacing one loan with another. It the the extra portion that is the problem as this is new borrowings. This is the case even if you were to pay it down and then bring it up to the same level again.
Once you put money into a loan, taking it out again is new borrowings.
The ATO looks at what the borrowed funds are used for to determine if interest is deductible.
A slower way around this is to stop paying interest on the loan and let it capitalise.
e.g Your $300,000 loan has been paid down to $200,000. Stop paying the loan and the interest (ie let it capitalise) of about $1000 pm will be added to it. After many years your loan will be $300,000 again and you will have $100,000, which you would have been paying, in your new PPOR.
But don't try this without advice - as you will need to set it up properly. If you were to simply stop paying the loan the bank may start legal action!
Once you put money into a loan, taking it out again is new borrowings.
The ATO looks at what the borrowed funds are used for to determine if interest is deductible.
A slower way around this is to stop paying interest on the loan and let it capitalise.
e.g Your $300,000 loan has been paid down to $200,000. Stop paying the loan and the interest (ie let it capitalise) of about $1000 pm will be added to it. After many years your loan will be $300,000 again and you will have $100,000, which you would have been paying, in your new PPOR.
But don't try this without advice - as you will need to set it up properly. If you were to simply stop paying the loan the bank may start legal action!
Thanks again.
Yep Ive read this approach before and it seemed like a good one but the benefit of this for you is to be able to use all "new" cashflow (vs current savings) towards paying off your home-loan.
Ok so without purchasing another IP/Shares/Income producing asset, I guess there is no way to use my equity to minimise my non-deductible home loan vs the deductible IP loan....
tx Terry and all who replied...
ta
paul
Yep Ive read this approach before and it seemed like a good one but the benefit of this for you is to be able to use all "new" cashflow (vs current savings) towards paying off your home-loan.
Ok so without purchasing another IP/Shares/Income producing asset, I guess there is no way to use my equity to minimise my non-deductible home loan vs the deductible IP loan....
tx Terry and all who replied...
ta
paul
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