Will I lose loan deductibility with this set-up?

To fund the IP we are taking a split loan of the equity in our PPOR, secured against the PPOR which will be used for deposit & purchase costs, and then a further loan secured against the IP @ 80%LTV for the difference, effectively allowing us to borrow the entire purchase costs thereby maximizing interest deductibility.

We have made, and had accepted, an offer on an IP but as yet there is no S32 so nothing is concrete.

As the deposit & costs are coming from equity, we were thinking of ‘activating’ that loan now so that the deposit & costs are in the bank ready to move as soon as we sign the contract.

I was about to instruct the bank to process the deposit loan, as it is secured against the PPOR and takes that total loan to 80% LTV of PPOR then it shouldn’t matter that we have not signed a contract for the IP yet.

However, I just had a thought. If the bank process that loan and the proceeds are deposited into our offset current account, even thought the loan is for investment purposes, does the fact it hits our current account first spoil the deductibility? Or is it ok as long as everything is receipted to amount to the original loan amount?

Eg. I’m hoping that say this loan is for $100k, we take the loan out now (without a signed contract on an IP), the monies go into our current account (I relise we could not deduct interest payments from the tax bill until we actually have an available rental property). We then pay the conveyancing, stamp duty and inspections from what is now our own money. Whatever is left of the $100k goes as deposit when the IP contract is signed. The balance is then made up of the new loan secured against the IP.

Does the fact the first loan against the PPOR technically hits our pockets first make it non-deductible? What I mean is, do we need the bank to pay the deposit & costs direct from the loan account in order to keep it all deductible?

I just want to check I’m not making a costly mistake by trying to get up front funds for purchasing costs.

Thanks.
 
OK, I just called the ATO for clarification.

The chap said that it's fine to take the loan out, leave it in our own account for a few months - even if that amount generates interest, then use the funds for purchase costs/deposit etc. As long as everything is reciepted so that it you are audited it is apparent what the loan was for, then having the funds paid into our own account and used later is fine.
 
That sounds about right, but I'm guessing you wouldn't be able to claim the interest on the loan until the settlement goes through. i.e. if you draw it down 6 months before the purchase, you could only claim the interest once settlement has gone through...
 
OK, I just called the ATO for clarification.

The chap said that it's fine to take the loan out, leave it in our own account for a few months - even if that amount generates interest, then use the funds for purchase costs/deposit etc. As long as everything is reciepted so that it you are audited it is apparent what the loan was for, then having the funds paid into our own account and used later is fine.

As long as there are no private funds in the offset nor private amounts moving into or outwards for the duration.

Cheers,

Rob
 
Its a bit of a grey area. Technically if you apply the law strictly, that money in your offset account is now tainted (if you have personal funds in there).

If you have advice from the ATO, make sure its at least written.. and preferably a private ruling.

You should be able to keep it all separate if you open a new savings account first with ING or something and put all the money there. You'd probably lose a little bit of interest in the mean time but this should be tax deductible I tink.
 
That's a problem then, as we only have one bank account and that is the offset account. Our wages are paid into it and it pays out our bills.

Why would it not be allowed if the proceeds went into an offset account as opposed to a regular account? I can maybe understand that the proceeds are reducing interest payments on the PPOR, but at the same time we'd be paying the equivalent interest off the loan so it would equal out.

I realize we wouldn't be able to deduct interest payments until the proceeds are actually used for purchase, rather than when the loan is actually taken out.
 
Didn't you say in your original post you are splitting your loan? So essentially the equity you take out of your PPOR will be put into this new split account yes?

No problems then.

Or are you simply refinancing and the equity you're tkaing out is going straight back into your existing account?

Best to split it and create a new account just for investment $$$
 
The equity will be split out into a seperate loan, but what I was getting at was if I take that split loan now and it sits in my pocket as such, then I pay the vendor - is that different to my bank paying the split loan proceeds direct to the vendor.

ATO seem to think it's ok, so long as the loan funds don't sit in my bank account for an extended period and as long as the bank documents specify the loan purpose is for an investment property.

It's a moot point now anyway, as the bank want the contract for the IP before they release the equity split anyway. Don't really see why as the equity split is only secured against the PPOR. Maybe becasue the loan purpose if for an IP they want to know that that's where it's going and that I'm not just going to squander it all?
 
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