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Most liked posts in thread: Borrowing against a property for investment

  1. Zaxon

    Zaxon The voice of reason

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

    upload_2019-6-12_21-6-47.png

    upload_2019-6-12_21-5-4.png

    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.
     
  2. Value Collector

    Value Collector Have courage, and be kind.

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    Yeah, you can definitely claim a deduction for interest used on an investment loan.

    What matters is the purpose of the loan, not be collateral.

    For example, if you borrowed $100k to buy shares, that’s an investment loan and is deductible, the fact that you are using some personal asset as collateral for the loan doesn’t mean it’s a personal loan.
     
    kid hustlr, BlindSquirrel and Zaxon like this.
  3. HelloU

    HelloU

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    deleted this zaxon but u got the gist
     
    Last edited: Jun 12, 2019
    moXJO likes this.
  4. Zaxon

    Zaxon The voice of reason

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    My understanding, based on discussions I've seen elsewhere, if 100% of a redraw is used for investment purposes (so not mixed purposes), since the redraw acts as a loaned sum used solely for investment, then the interest charged on that redraw should be tax deductible. Of course I could be wrong :). You may have to take out a second mortgage. But I'm not sure of that.

    I'm also of the understanding that a loan doesn't have to be a "business" loan. For instance, if you have an investment property, it's possibly a personal loan in your own name. But the income is still taxable, and hence the interest is still deductible.
     
    kid hustlr likes this.
  5. Zaxon

    Zaxon The voice of reason

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    This is from the ATO website. It speaks to interest on a loan being a deduction when used to buy shares, and that if a loan has a personal and investment part, as long as you can keep the parts separate, the interest on the investment part is deductible. I believe a redraw where 100% of the money is used for investment purposes, would qualify.

    upload_2019-6-12_12-56-15.png
     
    sptrawler likes this.
  6. Zaxon

    Zaxon The voice of reason

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    Let's break that down into two sections. Firstly, let's consider the ATO's requirements of a loan.

    Based on my understanding, plus based on Value Collectors comment:
    Based on the answer given by the ATO I quoted above:
    upload_2019-6-12_15-19-29.png

    For tax purposes, a loan doesn't need to have a purpose legally written into it to make it acceptable to the ATO. It just needs traceability. For instance, if I did a redraw on my home loan for 50k, that 50k then showed up immediately in my brokerage account, I then buy 50k worth of shares with that money, I've satisfied the conditions set by the ATO as a tax deductible loan.

    Your second point, as to the bank not allowing a home loan to be used for investing, I did ask my bank about that. "What if I paid off my loan in full. Could I take a new loan on my existing property, without having any intention of moving house? For example, if I wanted to invest the money?" My bank said it only cares that we can service the loan - high enough wage, and that they have an asset to secure the loan against - the house. Other than that, they didn't seem to care. Notwithstanding I haven't actually put that to the test.
     

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  7. Zaxon

    Zaxon The voice of reason

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    At least we know what going on in your head. We'll add that to your file.
     
    myrtie100 likes this.
  8. Value Collector

    Value Collector Have courage, and be kind.

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    Zaxon is right, as long as you can prove to anyone that asks questions that the funds were used to buy an investment you are safe.

    You can do a 50/50 personal and investment loan, and it’s totally legal, it just requires more paper work and record keeping.
     
    Zaxon likes this.
  9. Zaxon

    Zaxon The voice of reason

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    Fortunately, I've found one of those.
     
    Value Hunter likes this.
  10. Zaxon

    Zaxon The voice of reason

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

    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.
     
    myrtie100 likes this.
  11. HelloU

    HelloU

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    thx zax, schooled here.
     
    Zaxon likes this.
  12. Zaxon

    Zaxon The voice of reason

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    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.
     
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  13. Zaxon

    Zaxon The voice of reason

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    Getting the money into the trust is the tricky part. The usual methods are a gift or a loan. A gift I don't think would work in this case, since inside the trust it's free money. I don't think gifting the money to a trust counts as something to offset interest payments against.

    Loaning the money to the trust: I guess the trust could pay interest to you. It could realize the interest as a deduction inside the trust. You receive the interest payments from the trust, which you use to pay the bank with. Sounds awfully complicated.

    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). The bank is happy for you to spend that on a holiday etc, so investing it should be fine.
    Yup. I'd pay the interest payments personally. The bank would be none-the-wiser.
     
  14. HelloU

    HelloU

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    zax,
    a home loan redraw is not the same as a loan taken for income producing purposes - the ATO (or bank) does not care about a home loan redraw, or care where that money goes once in ur pocket. Do what u like with that ....... that interest has never been tax deductable.

    the other scenario, about taking a "new business loan", and getting a tax deduction for it, that is what i was talking about earlier.

    (and dunno why i deleted it now anyway seeing urs......lol)
     
  15. BlindSquirrel

    BlindSquirrel

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    A trust is not a legal entity. The account would need to be in the trustee's name (likely you).

    So you'd be lending $$ to yourself in your capacity as trustee? That doesn't pass the sniff test to me, but I'm no tax accountant.