advice for best direction from here??

This, like property, is a long term proposition. During that long term values should rise and yields will rise. Like a property portfolio it gets easier to own with time.

Nothing good comes easy.

 

I think I am confusing something here now... Thinking back a bit, why would I deposit the $32k (offset account cash) onto my loan only to borrow it immediately back in the form of a LOC? Where do the benefits in such a transaction lie?

 

You have decreased your nondeductible debt by $32K and increased your deductible debt.

Saves you tax.

 

I still cannot see where I am reducing my nondeductible debt by $32k when I am effectively not reducing my PPOR loan by any amount ??

The way I see it:

Current Situation
PPOR Value = $385,000
PPOR Loan = $296,000 (non-deductable)
Offset = $32,000 (cash)
Effective loan = $264,000 (@ 8.25% non-deductible)
Investments
Shares = $9,300

Recommended Situation
PPOR Value = $385,000
PPOR Loan = $296,000 (@ 8.25% non-deductible) @ LVR 80%
Investments @ LVR 50%
Shares = $9,300
LOC = $44,000 (@ 8.25% deductible)
Margin loan = $50,000 (@ 9.2% deductable)

Having laid that out I can see more clearly where some benefits lie. I still cannot see where I am reducing my no-deductable debt though.

1. Can anyone help explain how the tax advantages would help me? Can I receive 100% tax deductions for interest on the $50,000 (ML) + $44,000 (LOC) = $94,000??? I guess that would equate to $4600 (ML) + $3630 (LOC) = $8,230 per year in deductable interest to counter any income (+ tax) produced by the investments, and therefore direct tax savings.

2. So what is the catch with this type of strategy? You recieve tax benefits and leverage to increase the capital growth of investments without having to add any additional payments (unless a margin call is made).. Seems too good to be true

 

Because you paid the $32K in the loan was reduced right??

Now you redraw it to invest (via a LOC). This is a new loan which is deductible.

It doesn't matter what security a loan uses - it is what it is spent on that determines deductibility. This is a key point so please ask if you don't understand.

 

Cheching!! I see the light and is very clear now.. Thanks for that Simon.

 

I think you got it but this is an example I use with my clients who just cannot get it.

If you have a home with a loan and a clean LOC. If you use the LOC to buy shares, IP or business etc then the LOC is tax deductible even though it is secured by a non deductible home.

Alternatively, f you have an IP with a loan and a clean LOC and you use the LOC to buy the Jetski that your wife always wanted and a new frock for your girlfriend then that LOC isn't deductible even though the LOC is secured by the IP.

This is key for all new investors to get ahold of.