Borrowing against a property for investment

[HelloU]

This is what I have in mind. If you are ahead in your mortgage payments, you can do a redraw. A redraw counts as a separate loan from the tax man's POV (so I believe).

not advice

lots of scenarios getting jumbled together here which makes it confusing.
when peeps talk about changing a loan by talking to a bank, or getting a new loan, there is no problem with the tax deductability of the interest (up to a point) if the principal is used for investing. None of that is disputed.


but but but but but but
when peeps are talking about a redraw facility in an existing home mortgage account then ........ a story for u to analyse.

Monday i get a 100K home loan for a 100k house i just bought to live in - how much of this home loan interest is a tax deduction?

Tuesday i get a 10K gift from somewhere,

a couple of choices ....

Choice 1 .... i invest the 10K and pay tax on earnings (how much of my existing home loan interest is now a tax deduction?)

Choice 2 ...... i pay 10K off my home loan (how much of my home loan is now a tax deduction?)

i do choice 2.

But, the next day after doing choice 2 i redraw that 10K. So i am back to having a 100K loan and 10K in my hand (to invest). How much of my home loan interest on the 100K should i now expect to be a tax deduction?

Some peeps think that 10K of the 100k loan principal should now get me some tax deductions on the home loan interest that i pay on the 100K loan.

 

[HelloU]

spoiler alert .... all the answers are the same for those questions.

 

[Zaxon]

but but but but but but
when peeps are talking about a redraw facility in an existing home mortgage account then ........ a story for u to analyse.

I can see why you might think that. Fortunately, the ATO has made a ruling on this very matter.

Where the original borrowing is for non-income producing purposes [so a home loan for PPOR] and the taxpayer uses the redrawn funds wholly or partly for income producing purposes [borrowing for shares], that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible.

In practice it works this way. If you have an offset account that reduces your interest on the loan based on the money left in that account, that money is still 100% yours. Taking money out of that doesn't count as a loan

If you pay larger amounts than the minimum payment into a loan, that money is gone. It's no longer yours. In fact, some types of home loans don't allow redraws at all.

Under TR 2000/2, a redraw is considered a separate loan for tax purposes. As long as it goes into an investment, it's considered a separate, tax deductible loan, according to the ATO.

 

[Zaxon]

get a written ruling from the ATO on how it needs to be done

Fortunately, I've found one of those.

 

[Zaxon]

if it part of another loan then all repayments on that loan take a proportion of each loan.

That's why I'm specifically going through a redraw which forms a distinct loan for ATO purposes.

Normally it is wise to pay off the non claimable loan first and keep the tax deductible loan at its max.

Although it wasn't stated in my original post, that's essentially how I would use it. The scenario would be: take a loan out to buy a new house. Sell the existing house. Pay off the loan except the last dollar. Redraw on the loan for investment purposes. I have 30 years of cheap investment loans.

 

[HelloU]

thx zax, schooled here.

 

[BlindSquirrel]

I've got a similar set up (without the trust involvement). Home secured by 2 loans on one mortgage with an offset account attached to each loan. One loan + offset for the PPOR, the other is an investment loan and carries a higher interest charge.
I believe that it's all set up for me to claim the interest on the second loan as deductible. The investments are all income producing shares so that requirement is covered. I just need the shares to return more than the loan interest, which they currently do.

The investment loan repayments come from the second offset account. I'm only around 30% invested from there for now so the principal is reducing faster than I'd like but I'm not confident that this year's ASX capital gain is sustainable. I'm still waiting for the blood in the streets.
I could see Mrs Squirrel's eyes glaze over as I was explaining it all to her.

 

[Zaxon]

I could see Mrs Squirrel's eyes glaze over as I was explaining it all to her.

lol. Well it all makes sense to me.

One way to think about interest payments in negative return markets where you don't make enough to cover repayments, is to treat it like the 4% rule of retirement. When you retire, you've got to take a certain amount out of your account each year to live on, regardless of whether you're in a bull or bear market. The 4% rule works because the bull market gains outpace the bear market losses.

In theory, you could have a loan where the repayments (interest or interest + capital) equals your drawdown percentage in retirement. In a sense, it's a retirement trial. Using that mindset, you're no longer required to make enough to cover the repayments every year in earnings, as long as your average return over several years is enough to exceed the repayments, you're still on track.