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2 IP's - How do you work out proportion of loan on each?

Discussion in 'Real Estate' started by Sk3tChY, 23rd Jul, 2012.

  1. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Scenario:

    Bob buys his first investment property, a two bedroom apartment, for $250k with a loan of $200k.

    After two years he pays off $100k, leaving $100k owing on the loan.

    Bob redraws this $100k and buys his second investment property, a four bedroom house, for $500k.

    He decides to consolidate all his debts and takes out a new loan of $500k, paying off the old one.

    Bob now has a single loan of $500k on two properties, for which he paid $750k.

    Questions:

    1. If Bob decided to move into his first IP, what portion/percentage of the loan would be allocated to the property?
    2. If Bob decided to move into his first IP and sublet 1 room, how would he determine the portion of the property/loan that is being used for investment purposes?
     
  2. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    Bob is crazy!

    In hindsight he could have made things easier for himself

    To work it out you have to trace the funds and see what they were used for.

    First loan is $200,000 and relates to the purchase of IP 1. But Bob paid it down by $100,000 to the loan relating to IP 1 will be $100,000

    Bob then borrows $100,000 for IP 2. This loan relates to IP 2.

    Total loan is $200,000
    $100,000 for IP 1
    $100,000 for IP 2
    50% each

    how did Bob get a loan of $500,000? What was the additional $300,000 used for?

    So far as I can tell the $300,000 must have been used for personal expenditure. Therefore 20% of the loan interest will be claimable against IP 1 and 20% against IP2 and 60% not claimable.

    Bob should refinance and split the loan before paying any off this loan at all. Otherwise each repayment will have 60% going to the reduction of the personal debt, rather than the ideal 100%.
     
  3. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    Hey Terry, think you maybe misinterpreted what I meant:

    Bob had a 200K loan secured against his first investment property. (L1 secured against IP1)

    He paid off 100K on that loan, leaving 100K owing.

    Bob then bought his second investment property and took out a second 500k loan.

    This second loan was secured against both properties. (L2 secured against IP1 & IP2)

    The funds of the second loan were then distributed towards the following:

    100k - This was used to pay off the first loan (L1 is now non-existent)
    400k - This was used to purchase the second property.

    Therefore there is a single loan of 500k, secured against two properties.

    From what I've managed to gather thus far my guess is that it works like this:

    100K was put towards IP1.
    400K was put towards IP2.

    Therefore, if Bob were to move into IP1 he would only be able to claim deductions on 80% of the interest.

    Would this be correct?
     
  4. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    Loan for IP 1 is $100,000 and Loan for IP 2 is $400,000

    So 20% of the interest is associated with 1 and 80% 2