withrawing extra repayments plus equity from IP to pay deposit on PPOR - tax help pls

Hi everyone

I'm new to property investing so this may seem like a silly question to most of you, but I just want to check.

My partner and I have just bought our first PPOR together. We each have an IP in our names plus last year we bought an IP in joint names.

To put together our 20% deposit on the PPOR we used cash together with a withdrawal from my partner's IP (this used to be his PPOR and was making extra repayments each month to pay down the loan and had around $60k extra he could access without taking out a new loan/refinancing) plus he also got a "top-up" loan for $30k to tap into the equity in his IP, so now the IP has two loans against it. His unit was valued at $410k and the loan before we took out the $90k was $240k.

As far as I understand it, and please correct me if I am wrong, is that the interest on the $30k top up loan from the equity in the IP is definitely not tax deductible as this did not go towards purchasing an income producing asset. What about the $60k in extra repayments he had made over the past 5 years to pay down the principal on the original loan when it was his PPOR, as this was able to be withdrawn without taking out a top up loan, can he take that out of the IP loan and claim a tax deduction on all the interest? That loan now becomes $330k and then the top up loan adds a seperate $30k.

Sorry if this is a dumb question or if it doesnt make sense, but hope someone can clarify for me. Any advice is appreciated as we want to maximise our tax deductions obviously but without getting in trouble with the ATO.

Thanks :)
 
H
As far as I understand it, and please correct me if I am wrong, is that the interest on the $30k top up loan from the equity in the IP is definitely not tax deductible as this did not go towards purchasing an income producing asset.

Correct.

What about the $60k in extra repayments he had made over the past 5 years to pay down the principal on the original loan when it was his PPOR, as this was able to be withdrawn without taking out a top up loan, can he take that out of the IP loan and claim a tax deduction on all the interest? That loan now becomes $330k and then the top up loan adds a seperate $30k.

If this was extra repayments and then a redraw, then the 60k portion of this loan is not deductable. And whats more - you now have an accounting mess as you have one loan that is part deductable and part not ... you will need to proportion repayments between the two parts of the loan.

If however the original loan had an offset account and the extra repayments had been put into that, then the original loan would remain deductable .... (hindsight is a wonderful thing ...)

Regards,

Jason
 
Hi Nellybly

You are correct that the interest on the $30k will not be tax deductible as the funds drawn were not put towards an income producing purpose. Unfortunately the interest on the additional $60k redrawn on the original loan will also not be tax deductible as the ATO view the redraw as a 'new' borrowing. Although not much help here, you can avoid this problem going forward by making any additional repayments into an interest offset account rather than against the original loan. When you draw the funds back from the offset account the original loan retains its character.

Some things you might look at to maximise your tax position:

1. Quantity surveyor depreciation reports on all your IP's constructed after July 1985 to maximise deductions.

2. Repairs on your IPs (careful not to venture into 'improvement' territory).

3. Maximise your other IP claims e.g. inspection costs.

4. You can always generate more tax deductible debt which you can use to repay non-deductible debt by borrowing to buy a % of your partner's IP however that will trigger transfer duty and a potential capital gain (plus at a stretch could be tax avoidance).
 
Well much to my surprise I just checked with him and when he set us his PPOR loan he did set it up with an offset account and that is what he was paying extra repayments into, so we are lucky this time! Looks like it is only the top up loan of $30k to tap into the equity will be non-deductible then.

Thanks for your replies and advice, much appreciated. APJ we are looking into depreciation schedules at the moment as well as other possible ways of improving our tax position, so I'm glad we are on the right track.
 
Well much to my surprise I just checked with him and when he set us his PPOR loan he did set it up with an offset account and that is what he was paying extra repayments into, so we are lucky this time! Looks like it is only the top up loan of $30k to tap into the equity will be non-deductible then.

Thanks for your replies and advice, much appreciated. APJ we are looking into depreciation schedules at the moment as well as other possible ways of improving our tax position, so I'm glad we are on the right track.

Keep in mind that if you haven't been claiming depreciation in earlier tax returns for your IPs, then when you get your depreciation schedule done, you can put in amended tax returns for earlier years and claim the depreciation (or any other costs) that you haven't already claimed.

Check with your accountant, but he did (from memory) 3 years worth for us - wasn't that nice little unexpected lump sum! ;)
 
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