Offset account

Nicely said! So will a good accountant be able to determine the percentage thats claimable each year, or should I use that equity for managed funds (and do it now rather than later!)

If I then take the money out of the managed fund at a later stage for buying a ppor is my tax situation ok since the orginal intent for refinancing then is to fund an investment...

but at this stage I'm still living in the unit so only the equity part is tax deductable?

Whats the best way to get the equity out of the loan for the unit to buy a new ppor and make the unit a rental, and maximise deductabilty of the loan for unit?

 

This is where having the offset setup that we've been discussing would have been ideal. Otherwise you're a bit stuck if you want to make the debt on the unit deductible.

Others may have some ideas, but two things I can think of are:
1. Draw equity from unit and invest in shares/funds, and use distributions to help pay down new PPOR loan. The interest will be deductible because you're purchasing income producing assets.
2. Set up a HDT, take out a loan to buy units in the trust, the trust buys the unit from you and effectively pays you as the vendor. Take this cash to buy your new PPOR. (That's effectively what is done, in reality it isn't but your broker/accountant will use cunning paperwork to make it look like that). The interest on the loan is deductible since purchasing units in the HDT is viewed as purchaing income producing assets.

For option 2 others will be able to explain it better than me. And get professional advice.

John.

 

I think you are little confused here with the way the tax system works.

Just because you have equity in a property of which you have a loan, does not mean that you have a tax deduction. You get a tax deduction when the loan is servicing an investment.

i.e if you own a unit and have a loan, the interest for that loan is deductible. Or if you have a PPOR and the bank lets you access some equity in your place and creates a LOC and you then invest that money, you can deduct that interest. But if the purpose of what you are using this money changes to say go on a holiday, it is no longer deductible.

However, if you have a PPOR with a loan like your unit and you have equity built up in it, that doesn't mean you can start deducting some of the interest as a tax deduction.

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That's exactly where the IO+offset options would have been the best. Option 1 sounds good. Option 2, would incur CGT and stamp duty charges and would need some serious thought.

 

Currently we have just one property, the unit. If I got a line of credit on the equity of this place and invested that in navra, the interest on the loc would be tax deductable I think. If instead the loan was simply refinanced and was now 15% bigger, and that 15% was invested in navra, would the 15% of my interest payments be tax deductable or is it the purpose of the whole loan that is considered?

 

Yep.

How would you access that 15%?

 

The 15% would be deductible if all lumped in with the PPOR loan (85%). The problem is when you try to repay the nondeductible portion and let the nondeductible ride.

You must pay them both down at the same rate ie if you make a $100000 payment it would be $85000 to the PPOR part and $15000 for the MF part.

This is why I would prefer to see the loan be split at the very least.

 

On the current loan ($167636.19) for a villa unit worth 200000, can the bank create a line of credit for the value of the equity, and then have that money invested in funds? during this time the interest on the loc would be tax deductable?

Later on when I'm ready to purchase a ppor (and make the current unit a rental) could I use the managed funds money for purchase costs. Would the interest on the LOC still be tax deductable?

 

sent my broker the following

"Hi Leigh,

Is it an option to have the current fixed rate loan refinanced to take advantage of the increased value of the property, keep the interest rate at 6.74%, and have extra money in a split or LOC. The idea being that the withdrawn equity would go into managed funds, making the interest on that split tax deductable. Later on when a ppor is bought and the villa unit becomes a rental, the other split would become tax deductable as well.

Is that possible with our current loan?

Cheers"


his response

"Simon, Yes that is possible, there would be some cost incurred and possibly some Mortgage Insurance, it would mean that your property will need to be re-valued at a cost of $200 for valuation, before we know what equity available you have plus i would need to confirm servicing is ok as well.

It would not take to long to arrange, but you need to be prepared to make a small outlay to initiate valuation."



Is there anything I would have to double check before going down this path?

I guess I would have to make sure that the equity withdrawn was defintely on a split to separate it for tax purposes?