# Leveraging your home loan for income producing assets - tax implications



## rx2 (22 December 2010)

Hi,

Today I found out something that I thought was interesting - no doubt this is old news to most. We currently have a home with an offset account. Let's say the home loan is $500K, and there is $100K in the offset account.

If I take out $50K from the offset account and purchase an income producing asset i.e. shares w/ dividends - then the interest for the $50K is a tax deductible expense, with the interest obviously being @ the home loan rate.

I phoned up the ATO to day and spoke to a consultant who verified this is perfectly legal to do.

Anyway - thought I would share my discovery.

Cheers

RX2


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## tech/a (22 December 2010)

Yes is how I built a Property Portfolio in the 90s
It is a double edged sword if you get it wrong.
But can change your life if you get it right.


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## So_Cynical (22 December 2010)

rx2 said:


> If I take out $50K from the offset account and purchase an income producing asset i.e. shares w/ dividends - then the interest for the $50K is a tax deductible expense, with the interest obviously being @ the home loan rate.
> 
> I phoned up the ATO to day and spoke to a consultant who verified this is perfectly legal to do.
> 
> ...




You need to have a read thru the storm thread to have an understanding of the other side of the sword tech is talking about.....its not all sunshine, lollipops and tax deductions.

https://www.aussiestockforums.com/forums/showthread.php?t=13176


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## Julia (22 December 2010)

So_Cynical said:


> You need to have a read thru the storm thread to have an understanding of the other side of the sword tech is talking about.....its not all sunshine, lollipops and tax deductions.
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=13176



 Excellent advice.  This thread should be compulsory reading for anyone even considering such a move.


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## Smurf1976 (22 December 2010)

Suppose for example that I have a $100K loan and $100K in shares. Could I then claim 100% of the interest on the loan as a tax deduction, even though the loan is actually a mortgage?


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## bellenuit (23 December 2010)

Smurf1976 said:


> Suppose for example that I have a $100K loan and $100K in shares. Could I then claim 100% of the interest on the loan as a tax deduction, even though the loan is actually a mortgage?




Only if the loan was taken out to purchase an investment property. If for your PPOR, no.

But there may be ways to convert a non deductible loan into a deductible loan. For instance, you could sell your $100K of shares and pay off your mortgage. Then take out a margin loan and buy back the same (or a different) $100K of shares. There are lots of factors involved as to whether this is worth doing or not. By selling the shares, you may be realising a capital gain which will be taxable. The margin loan interest rate will likely be much higher than the mortgage interest rate, so even allowing for the deductibility, you may be worse off. 

In principle it should work, but it is unlikely to be of benefit to replace a mortgage. It might work if your existing loan is a high interest personal loan, or you have a large credit card debt that you have difficulty paying back. Beware margin calls though.


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## skc (23 December 2010)

So_Cynical said:


> You need to have a read thru the storm thread to have an understanding of the other side of the sword tech is talking about.....its not all sunshine, lollipops and tax deductions.
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=13176




The problem with Storm is not using equity in home to invest... the problem was leveraging the equity to invest.

If you are going to invest $100K in the market anyway, then, all things being equal, you will want tax deductions where you can. 

You will however need to place money in the offset account then say transfer it from the offset directly to the broker account. That way it is very clear from a record keeping perspective that those funds are now used for investment purpose.


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## hawamahal (19 July 2011)

I posted this in another thread, but posting here again.

Just a quick question on the issue.

I have got a home loan for my Primary Place of Residence and i have got spare money in the offset account. Say i took $50K out of that to buy Shares, I believe that i will be able to get a Tax deduction for $50K on the home loan Interest rate.


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## Garpal Gumnut (19 July 2011)

I must admit I like to sleep at night, and if my home is my own, and not subject to the whims of fortune or the malfeasance of folk like the Storm machine and the GFC, I sleep much better.

So my advice is work, and wheel and deal, with the object of owning your home. Then stop, and review, then continue to wheel and deal with OPM, as much as possible, not leveraged to your home.

Many would disagree with this conservative approach. I've been rich and poor, and being young beats both of them.

gg


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## nulla nulla (19 July 2011)

bellenuit said:


> Only if the loan was taken out to purchase an investment property. If for your PPOR, no.
> 
> But there may be ways to convert a non deductible loan into a deductible loan. For instance, you could sell your $100K of shares and pay off your mortgage. Then take out a margin loan and buy back the same (or a different) $100K of shares. There are lots of factors involved as to whether this is worth doing or not. By selling the shares, you may be realising a capital gain which will be taxable. The margin loan interest rate will likely be much higher than the mortgage interest rate, so even allowing for the deductibility, you may be worse off.
> 
> In principle it should work, but it is unlikely to be of benefit to replace a mortgage. It might work if your existing loan is a high interest personal loan, or you have a large credit card debt that you have difficulty paying back. Beware margin calls though.




Or you could pay out your mortgage, then arrange a line of credit at mortgage rates.


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## medicowallet (19 July 2011)

rx2 said:


> Hi,
> 
> Today I found out something that I thought was interesting - no doubt this is old news to most. We currently have a home with an offset account. Let's say the home loan is $500K, and there is $100K in the offset account.
> 
> ...




I don't see how on $50k how

at approx 1.4% difference as a margin loan vs a home loan (and that is for a ppor property loan, not an investment loan)

at approx 40% marginal tax rate

0.64% on $50k saving is anything to write home about.


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## skc (6 April 2013)

A question please:

Suppose Peter has fully paid off his home. He arranges a line of credit with a bank to the tune of $250k. The loan is drawn down with the $250k sitting in the 100% offset, so essentially there's no interest charged.

Later, Peter buys $100k in shares by transferring money from the offset account to the broker account. It's pretty clear that he's borrowing to invest so the interest on the $100k is fully tax deductible. $150k still sits in the offset.

Over the next 12 month Peter has saved $20k. He puts that into the offset account to reduce his interest. So there's now $170k in the offset account. The $100k is still in the broker account holding shares. All interest incurred are still tax deductible - again I think that's pretty clear.

Now, Peter buys another $50k in shares by transferring money from the offset account to the broker account. So he's invested total of $150k in shares. The offset account now has $120k, and the loan drawn is $130k. 

The following day, Peter withdraws $20k from the offset account and gives the money to his wife to buy handbags. The offset account is now $100k, and the loan drawn is $150k.

Question is: Can Peter claim interest deduction on $150k of loan balance? 

Is not, should Peter have first transferred his $20k savings out of the offset account, then move $50k from his offset account to the broker account to ensure tax deductibility?

I know the tax system is complicated and senseless in a lot of ways so nothing will surprise me.


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## drsmith (6 April 2013)

skc said:


> The following day, Peter withdraws $20k from the offset account and gives the money to his wife to buy handbags. The offset account is now $100k, and the loan drawn is $150k.
> 
> Question is: Can Peter claim interest deduction on $150k of loan balance?



To the best of my knowledge, no.

The answer lies in what he did earlier,



skc said:


> Over the next 12 month Peter has saved $20k. He puts that into the offset account to reduce his interest. So there's now $170k in the offset account. The $100k is still in the broker account holding shares. All interest incurred are still tax deductible - again I think that's pretty clear.




He has effectively paid off $20k from investment debt and has then drawn it back down for private purposes.

What he has borrowed the money for is the specific point here. That effectively has nothing to do with how he's managed the debt beforehand.


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## Vixs (6 April 2013)

I wouldn't be taking any tax advice from this thread alone.

How you structure your loans is well worth talking to a professional about. If you screw it up at the start you may have screwed yourself in a big way.

I've seen some absolutely atrocious work done by bank and other mortgage brokers over the past 12 months, that is far from an ideal situation for the borrower.


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## ROE (6 April 2013)

hawamahal said:


> I posted this in another thread, but posting here again.
> 
> Just a quick question on the issue.
> 
> I have got a home loan for my Primary Place of Residence and i have got spare money in the offset account. Say i took $50K out of that to buy Shares, I believe that i will be able to get a Tax deduction for $50K on the home loan Interest rate.




you got to be able to separate the two, best to get the banks to setup another account pump 50K in there
and all the interest on that account you can deduct...


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## drsmith (6 April 2013)

If I understand the following example from the ATO's legal database correctly (TR1999/D3), I'll have to correct what I said last night.

I've highlighted the bits specifically relevant to the offset account 



> Example three
> 
> *44. Kathy has a home loan that is linked to an interest offset savings account into which her wages are paid and from which she makes private drawings for living expenses. The credit balance of the interest offset savings account reduces the interest payable on her home loan.* Kathy also has a separate home equity line of credit that comprises two sub-accounts. One sub-account is used to borrow money that is used solely for investments in income producing shares. Another sub-account is used to borrow money that is used solely for holidays. Kathy moves to another city on work for six months and rents out her home.
> 
> *45. In the period in which Kathy's home is available for rent, the interest accrued on the outstanding balance of her home loan will be fully deductible. The deductibility of that interest will not be affected by private drawings from the interest offset savings account.* The interest accrued on the line of credit sub-account used solely for investments in income producing shares will be fully deductible. The interest accrued on the sub-account used solely for holidays will not be deductible.




This example to me suggests that the deductibility of loan interests depends purely on what the loan monies are borrowed against, not the use of the offset monies. In other words, transactions in or out of the offset account do not affect the underlying deductibility of interest from the loan for tax purposes, regardless of the use.

This implies that where monies are borrowed for a private purpose such as a principal place of residence with an offset facility attached to the loan, interest from the loan is not deductable where monies are drawn down from the offset facility, regardless of the use. 



skc said:


> The following day, Peter withdraws $20k from the offset account and gives the money to his wife to buy handbags. The offset account is now $100k, and the loan drawn is $150k.
> 
> Question is: Can Peter claim interest deduction on $150k of loan balance?




Coming back to your original question, poor Pete might be in the poop not only in relation to interest deductibility for his wife's handbags, but for the interest on all borrowing given that the offset account is linked to a loan associated with a private asset. This situation though is further complicated though as Peter has paid off the loan and organised a new line of credit. If he's done that (as opposed to redrawing from an offset account linked the original line of credit) that may make a difference, I'm not sure.

This doesn't make logical sense to me in the sense in that it is different to monies drawn directly from a loan account (home equity lines of credit in the above example). Perhaps the best advice I can offer then in the absence of a definitive answer from the ATO's legal database is that he either seek professional advice or a private ruling. 

http://law.ato.gov.au/atolaw/view.htm?locid=DTR/TR1999D3/NAT/ATO


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## drsmith (6 April 2013)

Cathy in the example above may be a little more cunning than the ATO anticipates.

She'd finance her holiday not from the private equity line of credit, but from the offset facility when her home was being rented. No prizes for guessing where her general living expenses and her handbag budget would come from either.


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## sydboy007 (8 April 2013)

rx2 said:


> Hi,
> 
> Today I found out something that I thought was interesting - no doubt this is old news to most. We currently have a home with an offset account. Let's say the home loan is $500K, and there is $100K in the offset account.
> 
> ...




Beware gearing up to invest in sya shares that are already geared.

Gearing can double ya profilts AND LOSSES.

generally slow and steady will serve you better than the hunt for a triple bagger.


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## skc (8 April 2013)

drsmith said:


> He has effectively paid off $20k from investment debt and has then drawn it back down for private purposes.
> 
> What he has borrowed the money for is the specific point here. That effectively has nothing to do with how he's managed the debt beforehand.




No. The $20 saving was put in the offset. It's not paying off the debt and so there's no drawing back down. That's the difference between offset account and early payment then redraw.

Anyway - probably best not to confuse the audience with complicated tax deductibility stuff on this forum.

I will ask Peter to speak with his tax accountant.


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## drsmith (9 April 2013)

skc said:


> I will ask Peter to speak with his tax accountant.



Did you see my second contribution on this after finding a ruling in the ATO's legal database ?

Upon reading that, I effectively drew the same conclusion.


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## skc (9 April 2013)

drsmith said:


> Did you see my second contribution on this after finding a ruling in the ATO's legal database ?
> 
> Upon reading that, I effectively drew the same conclusion.




Yes thanks. Cathay was mixing private home loan with investment. Peter has a straight investment loan so it's actually simpler and clearer.


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