Home Forums Money matters Using my home loan to fund investment property

  • This topic is empty.
Viewing 10 posts - 1 through 10 (of 10 total)
  • Author
    Posts
  • #999937
    brownbag
    Member
    • Total posts: 37

    My wife and I are buying an investment property. We own our own home and have a mortgage on it, but it is 100% in offset, so we currently make no repayments and pay no interest.. And we have available funds in there to help pay for the property.

    If we use funds in our home loan to cover the costs of purchasing the property, and record everything accurately, can we claim the interest costs of our home loan? Does this apply to purchase of property, stamp duty costs, capital improvements and maintenance?

    #1221931
    bb1
    Participant
    • Total posts: 4,472

    Best way is to talk to your accountant, every situation has different scenario’s

    #1221932
    brownbag
    Member
    • Total posts: 37

    Not really. It’s a basic taxation law question. Maybe my question wasn’t clear enough – I’m not asking if it is helpful to do this but if it the interest costs of these investment redraws is claimable. So the answer is the same for everyone in this case.

    #1221933
    JamesMillar
    Participant
    • Total posts: 1,675

    Firstly – as simple as this matter (and many others) may appear, Bert’s warning about seeking professional advice is well founded. There are so many nuances in tax law and strategy that hinge in subtle facts that are generally only identified through collaboration with a professional. Forums with free advice are not an ideal solution for high stakes tax strategy. If you were to lose a deduction for interest it may have a big effect on the economics of this investment (maybe tens of thousands of dollars maybe hundreds) – so paying a good accountant is money well spent.

    Ok on to question at hand.

    1. The security used for the loan is not relevant in determining the deductibility of the interest expense. Its the application of funds from the underlying loan borrowing that determines the deductibility. You may have known this.

    2. In the case of a pre-existing offset account being used against a pre existing loan – in order to establish a clear nexus between the loan borrowings and the investment we would typically recommend that the underlying loan be repaid in full and then redrawn to acquire the new investment. This is different to simply using the existing offset account cash. Yes it adds another seemingly pointless step but it creates the clear nexus between the borrowed funds (and interest) and the use of the funds. Most loan accounts have a redrawn facility to allow this.

    In normal circumstances we generally don’t recommend that the underlying loan ever be repaid (we prefer use of offset accounts because it gives more flexibility with interest deductions). This case is an exception because you are seeking to change the nexus for the borrowing from one investment to another.

    Merry Christmas

    #1221934
    brownbag
    Member
    • Total posts: 37

    Thanks James. In relation to my situation, the underlying loan has basically already been paid in full as it’s all in the offset. So there’s no non-investment interest on the account so it makes it simple – if all funds are spent on the investment, then they are all tax deductible. In order to make it simpler, I’ll also use a separate savings account as a repository for funds to be spent from. Then I can use the statements from that account (as well as receipts) as my paperwork.

    #1221935
    JamesMillar
    Participant
    • Total posts: 1,675
    brownbag, post: 268115, member: 112769 wrote:
    Thanks James. In relation to my situation, the underlying loan has basically already been paid in full as it’s all in the offset. So there’s no non-investment interest on the account so it makes it simple – if all funds are spent on the investment, then they are all tax deductible. In order to make it simpler, I’ll also use a separate savings account as a repository for funds to be spent from. Then I can use the statements from that account (as well as receipts) as my paperwork.

    I don’t think you fully followed my post (which is why you should probably get an accountant).

    From a tax perspective the outcome will be very different for you based on what you have said. As stated, parking the funds in an offset deposit account mitigates the interest but from a tax perspective a redrawn from the offset is not the same as a redraw from the underlying loan account. If you want to create the required nexus with the new investment you must pay down the actually loan (not offset) and then redraw into investment. Subtle difference makes all the difference in the world for tax even though the economic outcome is the same.

    You proposed approach would deny a tax deduction for the interest which would be a costly mistake which cannot be undone. My advice – never take for granted the most subtle element for tax. Case outcomes hinge on the detail.

    #1221936
    JamesMillar
    Participant
    • Total posts: 1,675

    Adding to that the redraw from the loan will ideally go directly into acquiring the asset and not be parked back in the offset pending settlement. Tracing and disputing nexus is what the ATO does with interest claims.

    #1221937
    brownbag
    Member
    • Total posts: 37

    From a tax perspective the

    JamesMillar, post: 268120, member: 5318 wrote:
    from a tax perspective a redrawn from the offset is not the same as a redraw from the underlying loan account. If you want to create the required nexus with the new investment you must pay down the actually loan (not offset) and then redraw into investment. .

    Thanks for the valuable advice. I’m making an appointment to see an accountant, but they’re not available until the 7th January, so in the meantime, I’m doing more research (I’m going to have to pay the deposit around then, I won’t have much time – xmas and new year makes this all a challenge).

    So can I ask two questions:
    1. Can I clarify what you mean by a redraw from the offset is not the same as a redraw from the underlying loan account.
    Are you simply referring to the difference between a redraw and the use of my linked debit card to make a payment through the offset?
    2. What do you mean by ‘pay down the actual loan (not offset)?
    All my money is in the offset account atm so how can I pay down the actual loan?

    #1221938
    JamesMillar
    Participant
    • Total posts: 1,675

    The offset solution offered by banks involves two separate distinct accounts and account types. The first account is the underlying loan that will always be in debit balance (from bank perspective) and that is the account that you borrow funds from. The application of the funds drawn from that underlying loan account is what determines its nexus to the investment and therefore the deductibility (or not) of the interest expense. With an offset solution the bank will create a second deposit account for you that is linked to the underlying loan account. This deposit account will generally be in credit balance (from banks perspective). As you probably understand, the interest on the loan is calculated on the basis of the net balance between these two accounts so ifs a great way of managing your debt and reducing interest expense. It’s much better than earning interest income on the deposit account which would otherwise we taxed.

    If you just take money out of the deposit offset account then that will not create a new borrowing nexus from an ATO tax perspective. This is actually often helpful because it actually provides a lot of flexibility with tax planning if you move between properties you own.

    if you want to create a new nexus for interest deductions on a new investment the money needs to come from the first underlying loan account NOT taken out of the offset account funds. So it just adds an extra seemingly pointless step but that step makes all the difference under the tax law. You take the funds from the offset account and pay down the underlying loan account and then redrawn for the new investment. You need to check the underlying loan account allows this (most do) and that the bank are happy with redraw for such a purpose and that the allowable redraw balance is still high enough. Sometimes with P&I loans the available balance reduces a lot and you may need to get that lifted – which could require a new loan application in the current climate.

    speak with your accountant and your bank ASAP

    #1221939
    JamesMillar
    Participant
    • Total posts: 1,675

    And given that I don’t know anything about the rest of your circumstances then you should not rely on this commentary in setting your borrowing structure for this investment or any other. This is general limited commentary based on the way tax operates.
    Seek professional advice from your accountant before doing anything.

Viewing 10 posts - 1 through 10 (of 10 total)
  • You must be logged in to reply to this topic.