Using property equity to invest in shares

[cutz]

I'm not suggesting that anybody consider my question from 2 posts ago, but I would appreciate an answer to it! Thanks.

I would apply the same logic if buying a block of land using a LOC, can you claim the interest ? >>No, the block of land isn't producing an income.

Is the specy paying a dividend ? If the answer is no I can't see how you are entitled to claim the borrowing costs.

Note, this is my interpretation only. My advice would be to consult a tax professional.

 

[Krusty the Klown]

The tax law says that the interest is deductible when the geared asset produces assessable income or has a reasonable chance of producing assessable income.

So deductibility would differ for each situation.

If the asset has a history of paying dividends but it is not at the moment, then it reasonable to assume it will in the future and would be deductible in the current tax year.

If you take it a step further, a company or business' sole reason for existence is to produce profit for its owners. Therefore dividends can be declared at any time even if earnings are retained regularly. To me if this asset is geared then I interpret this interest to be deductible and is the advice I give to my clients. However, this is only for deductions in the current tax year.

You can also claim the interest deduction using the CGT provisions, simply including the interest expense in the cost base when calculating the capital gain or loss. If you bought an asset with the idea of profiting from capital gain - then that is assessable income and interest is deductible.

Either way the interest is deductible, its just how you claim it that is the issue.

A vacant block of land is not a different story. If you are paid agistment fees or timber rental income, then this geared asset interest would be deductible in each tax year.

But a vacant block of land with no commercial activity taking place would not be deductible each tax year but is still deductible. If you bought the land with the idea of profiting from capital gain then the interest is still deductible but can only be claimed by adding the total interest cost to the capital cost base as above.

Hope that helps

 

[Ozymandias]

All this has been discussed before, check out this excellent thread;

https://www.aussiestockforums.com/forums/showthread.php?t=18340

Also check out tax ruling TR200/2. If you have redraw on your current home loan, you may not need to setup a separate account / loan, or ask the bank for extra money, if you're ahead on your payments.

 

[luap77]

Thanks for the replies.

Ozymandias; I was part of that thread (thanks for pointing the thread out)...just had a few things greyed by contradictory responses from the ATO when I put such questions to them (didn't know which way was up by the end of it!), hence came back to ASF for further clarification.

Krusty; found yours especially helpful Gives me a great starting point for seeking my own financial advice should I wish to make my own decisions along such lines. Much appreciated.

 

[Krusty the Klown]

No problem luap.

The key to understanding tax is that it is governed by laws. Laws are interpreted differently - by lawyers, judges, courts, the ATO, and taxpayers. You have to look and see how the law applies to you - not anybody else.

Just because someone else tried something and it did not work, it does not mean you can't apply it.

The problem is tax law is very complex and not an exact science. Hence the common misunderstanding about the deductible interest on a vacant block of land. Easy mistake to make when you look at the ATO website.

Keep in mind ATO employees are not qualified to give tax advice just because they work there. All they can do is read to you the same stuff you see on the ATO website. How you interpret that is up to you.

By all means approach the ATO for facts but not opinions. But that's just my opinion.....

 

[luap77]

Found some confirmation of what Krusty mentioned in his post of 8th March.

http://www.thebull.com.au/articles_detail.php?id=3395

Thanks again Krusty.

 

[RamonR]

-read the Storm thread first



-Don't even consider the above, double gearing. You're a genius while it works until the unexpected happens and then, wipe out(and the unexpected will happen).

I absolutely disagree.
Using this strategy during the lowest point and still here and happy.

Agree that you should know what you are doing and should avoid being excessively geared.
I use my asset line for long term holds and margin loans for trading purposes.

 

[Cobweb]

Just read this thread, sorry for my ignorance but what is a Black Swan and what does LOC stand for?

 

[So_Cynical]

Just read this thread, sorry for my ignorance but what is a Black Swan and what does LOC stand for?

Black swans explained http://en.wikipedia.org/wiki/Black_swan_theory

LOC = Line Of Credit http://en.wikipedia.org/wiki/Line_of_credit

 

[Cobweb]

thanks So Cynical

 

[tech/a]

If you have increased equity from your home why would you not duplicate it with another IP (Investment Property).
You can have someone pay the interest you can claim most things and enjoy 2 increasing assets.
Then Do it again.
Then Do it again.

 

[drsmith]

if you starting out start the hell away from margin loan, this can get ugly quick...using equity is the safest options, you never face margin call
and you sell and buy when you want as long as you keep the repayment up
banks dont care...plus much cheaper interest too..

say you own 50K on a property worth $350K, you want to take out 100K for shares

what you need to do is go to your banks and say you want to draw down some of the equity in your home and create a seperate account for tax purposes.

once all the paper work approved, they give you the cheque, you deposit into your shares account and start keeping the paper on interest payment on your new seperate account and your shares account.

When first investing in shares I started with a margin loan but that was because I did not own a home at the time. I had a secure job and cheap rent and was conservative with the level of gearing on the margin loan.

After I purchased a home I used the equity in that ahead of the margin loan for the reasons quoted above. The home is long since paid off but I retain some access to home equity credit as the balance of the loan is held in an offset account.

One though should never gear to the max with home equity and then a margin loan on the top of that. That's a recipe for disaster.

Come to think of it a margin loan on it's own geared anywhere near the max is a recipe for disaster as many margin lender investors from 2008 would confess.

 

[drsmith]

If you have increased equity from your home why would you not duplicate it with another IP (Investment Property).
You can have someone pay the interest you can claim most things and enjoy 2 increasing assets.
Then Do it again.
Then Do it again.

Just remember towards the end though to leave a little profit for someone else.