Your Investment property can cost you nothing to keep

[BV]

Here is an idea for a rainy day

I have an Investment Property and I want it to be self supported financially. I don't want it to cost me anything to keep.

Lets say I have an 100K mortgage
I get 10K in rent but need to pay 12K in interest and 2K in rates repairs etc.

I could borrow the 4K that I need to pay for these expenses
from the I/P LOAN redraw facility or Line of Credit so the mortgage
increases to 104K.

I claim the 4K loss.
I get back about 2K through my tax return
which I can use to go on a holiday or can put it into my PPOR loan pay off car loan etc.

One day I will pay CG tax but at the moment the I/P is not costing me anything to keep and can help my budget.

I was wondering if this was legit so I asked my accountant the question if I could claim the shortfall in interest, council rates etc as loss although I borrowed the money.

He said it was a legitimate transaction and that I could claim it.

Many who have an ordinary loan they need to change their loan to a line of credit like the STGEORGE Bank portfolio.
There could be other mortgages around from other banks that do the same thing.

You will then need to increase the loan limit by an amount that you will feel comfortable with. eg 20K more than your current loan perhaps?.

There is no need to overdo it because you will pay stamp duty on the extra money you borrow.

Any comments, arguments from our senior members?

BV
sorry, I meant to say our expert members

 

[always_learning]

Originally posted by BV
Here is an idea for a rainy day

Lets say I have an 100K mortgage
I get 10K in rent but need to pay 12K in interest and 2K in rates repairs etc.

I could borrow the 4K that I need to pay for these expenses
from the I/P LOAN redraw facility or Line of Credit so the mortgage
increases to 104K.

I claim the 4K loss.
I get back about 2K through my tax return
which I can use to go on a holiday or can put it into my PPOR loan pay off car loan etc.

Not that I would call myself a senior member, BUT capitalization of interest ie 2K is a bit of a no-no from the tax office. But you can capitalize the 2K of expenses.

If you have any mortgage on you PPOR (generally the house you live in) then capitization of these expenses in my opinion are an excellent idea. Paydown non-tax deductable debt before paying the first $1 of tax-deductable debt.

 

[Aceyducey]

BV,

Why not buy a positively geared property?

Or a cashflow positive property (negative geared but adds $ to your paypacket after depreciation & neg gearing benefits are taken into account)?

Or look for better returns over the next few years in a different asset class?

Your strategy involves borrowing more, which means you need to be able to securitise it...leads to a potentially greater gap between what you owe & what you can afford....

Cheers,

Aceyducey

 

[Sim]

Re: Re: Your Investment property can cost you nothing to keep

Originally posted by always_learning
capitalization of interest ie 2K is a bit of a no-no from the tax office.

If you have a sound business reason for doing so, you should be okay with this. Actually having a sound business reason (and not just a contrivance) is the key though.

 

[BV]

Guys,

I know that capitalising interest is not allowed and so does my accountant.

I was very specific in my question to him, we discussed this in detail and covered the court case too.

This is not the same as capitalising interest or shifting your PPOR debt into your I/P. You are simply borrowing to cover your business expenditure which is legit.

But thats his opinion which is why I wanted a 2nd opinion from a member with expertise in this area.

Aceyducey
Ofcourse buying positive geared property is ok too if you can find one and you are happy with the area.

But this idea is for negative geared property
The thought here is to cover yourself in case you lost your job
your wife got pregnant (and cant work) etc.

With an increased mortgage, security can be an issue for some people but if you have some CG in the property or the I/P is secured against your PPOR then no problems.

And yes your debt will creep up slowly but who cares,
they are slow increases and it helps your cash flow short term which can be important.

Long term, the capital gain, inflation and rental increases will make it all good.

BV

 

[Aceyducey]

Originally posted by BV
Long term, the capital gain, inflation and rental increases will make it all good.

Yes it will. I'd ensure that 'long-term' was considered at least 10 years in the current climate

Better to manage the risk than to risk the farm.

Cheers,

Aceyducey

 

[Robyne]

Hi BV,

This sounds a bit like our discussion on "Split Loan Case Finally Resolved". I have spoken to my accountant about it too. My accountant is very conservative. I have considered changing accountants because he is so conservative but have not done so yet. He said that you can capitalise the interest as discussed (after the incoming rent is paid to the IP debt).

Sim,
You sound like you have some specific knowledge in this area. Do you have a legal reference for the requirement of a sound business reason? I am guessing that paying off the mortgage on your PPOR would not be considered a sound business reason.

Robyne

 

[Sim]

Originally posted by Robyne
Sim,
You sound like you have some specific knowledge in this area. Do you have a legal reference for the requirement of a sound business reason? I am guessing that paying off the mortgage on your PPOR would not be considered a sound business reason.

No specific knowledge, just comments based on what I've read elsewhere.

If part of your business strategy includes minimising cashflow required for asset purchases by capitalising interest for a period of time, then you may be able to put forward a strong enough case for a legitimate claim.

An example might be for developers who are holding land for development which will be later sold off at a profit (not a long term investment). With minimal income initially, capitalised interest could be a good strategy to allow them to progress without the need for cashflow to cover the loan interest until they are able to begin to realise income from the development.

However, I would suggest that regular residential property investors would never have a reasonable claim to capitalise interest (unless the Hart case goes against the ATO).

This is not advice, and may be incorrect, I am not an accountant or tax specialist, you should rely on your own advisors.

 

[BV]

I went back to the accountant and clarified it.
It looks like I didn't have the concept right.

The way to do this would be to have a separate small loan say 20K in the form of line of credit just for the purpose of paying the bills and any shortfall in interest.

That way it will be legit

Redraw facility from the same loan will not work.
To be able to claim the interest paid on the small loan the purpose of the loan must be solely to support the I/P.

As many people know drawing funds from the main I/P loan to pay the interest is not liked by the ATO.

Robyne, we started this discussion in the thread"Split Loan Case Finally Resolved" but I thought a more specific thread would be more useful.

Bill

 

[RPI]

You could also use a cashbond to increase your serviceability with lenders and meet the cost. The interest for this is also tax deductible see the recent post by steve.

 

[BV]

RPI

How does a cashbond help serviceability?
Are they easy to get irrespective of the size of your loans?

BV

 

[Bill.L]

Hi all,

BV, A while ago on another thread, I worked the numbers on the property we bought in '81, to see where we would be at.

The starting value was $44,000, and if we had borrowed for all out of pocket expenses, and kept borrowing to pay the increasing interest bills, then the property in 2003, that is now worth around $250,000, would have associated loans of around $240,000.
One assumption was that any tax benefit was spent and not paid off the loan. It also took into account changing rents, expenses and interest rates!!

This was for an average house in an average suburb.

The one thing that occurred to me was that there is no such thing as a free lunch.

bye

 

[BV]

Bill

I don't like the idea of my debt escalating either.

It depends on where the I/P is, how much you have borrowed etc.

But if I have a 14K loss on my I/Ps per year and I borrow that
to pay the bank, then I can concentrate all my income in reducing the debt in the PPOR.

I will still be liable to pay interest out of my own money but it will be 7% of 7% of the original loan i.e 0.5%
and that will be claimable in my tax return
too so it will be halved to about 0.25%.

As an example to hold 200K and lets say I decided not to put the rental income into that loan, I will be out of pocket by $500 the first year a little bit more next year etc.
Short term I don't see a problem, do you?

So in this example I took all the rental income of 12K and forwarded it to my PPOR account.

At the same time, I can claim the I/P losses of 14K and that will give me a refund of 7K to put into your PPOR loan or whatever else you want.

I will pay 50% tax on the rental income so I am left with
6K from the rent + 7K refund.

Just a thought.
Any objections?

BV

 

[Melbear]

Originally posted by BV
So in this example I took all the rental income of 12K and forwarded it to my PPOR account.

At the same time, I can claim the I/P losses of 14K and that will give me a refund of 7K to put into your PPOR loan or whatever else you want.

Isn't that capitalising interest, which is still being argued in the courts? And in fact, claiming a loss of $14K is incorrect as you do need to account for the rent.

So the 'loss' would be rent - expenses for the tax return.

 

[BV]

Mel

I am borrowing from loan 2 (Line of credit) to pay the interest
in I/P loan 1.

I/P loan 1 is not increasing.

I will pay the interest for loan 2 to the bank
so interest in loan 2 is not added to the loan.

The 2nd loan is increasing only by the amount that is going to loan 1.

The rent gets added to my income and its taxed at 47% or so.
So I am left with about half of it i.e 6K.

How is it capitalising?

BV

 

[Melbear]

Putting in my own figures

Rent = 10,000
IP Loan 1 = 100,000. Interest = $7,000.
IP Loan 2 = 0
PPOR = 50,000

After 1 year
IP Loan 1 = 100,000
IP Loan 2 = 7,000
PPOR = 40,000 less other principal repayments made during year

How is this not capitalising? Your IP loans are now 107,000, and your PPOR has been reduced by the rent.

I am happy to be wrong, and I like the idea, but it looks like capitalising interest to me. Unless you do not claim the interest on IP Loan 2 as a tax deduction?

 

[BV]

Mel

If you take money out of your I/P loan to pay for the interest in the same loan then you will be capitalising interest.

But I was told by my accountant that if you borrow money from another account to pay for your out of pocket I/P costs and provided that the interest on the 2nd loan is paid monthly from your cash reserves then its not capitalising interest.

You are simply borrowing more money to cover your costs like as every business can do when they have cash flow problems.

I did not discuss the possibility of pocketing the after tax rental income which seems to me like a logical thing to do.

I was expecting the accountants in this forum to join in an
tell me if I had it all wrong or not but it hasn't happened yet.

As this is an interesting idea, I am thinking of asking the ATO
for their opinion in writing.

BV

 

[gazza]

BV

This is pretty much how I have got my IPs currently structured. It is a structure recommeded by my financial advisor and one that my accountant has no problem with.

Gazza

BTW I have sent you a PM to discuss

 

[geoffw]

Likewise.

But it's not only IP expenses.

To reiterate again what I said before

I have a mortgage against my home, and a LOC which is used purely for investment purposes. I borrow against the LOC to pay for a deductible debt, and reduce my home mortgage by the same amount (well, I did before I got the PPOR mortgage down to zero).

Let's say I am going to buy $5K worth of shares. I use the LOC to but those shares- so the interest on $5K is deductible.

But I do have $5K in cash- I use that to reduce my PPOR mortgage.

So the interest on the $5K is converted from non deductible to deductible debt.

You could even use that LOC to pay for a book worth $20. Not much- but you're going to buy it anyway, and the numbers add up.

All my PPOR debt is now deductible- from $100K about three years ago.

 

[BV]

Gazza
thanks for your input.

GeoffW
Sorry, I don't get it
When you borrowed the 5K to buy shares
you are supposed to spend it for that purpose don't you?

So you have 5K worth of shares
How do you convert that 5K to cash?

BV