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Debt recycling question

Discussion in 'Investing Strategies' started by cleo, 28th Oct, 2011.

  1. cleo

    cleo New Member

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    28th Oct, 2011
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    Location:
    Bris, Qld
    Hi,

    I have a question re debt recycling.

    I currently have a share portfolio + margin loan. If I buy a house (PPOR), and I draw down on the home loan to pay off the margin loan does this turn the drawn down amount into an investment loan for tax purposes as it would if I bought shares outright?

    Cheers
     
  2. GregR

    GregR Reid Consultants

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    13th Jul, 2009
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    Location:
    Berwick Vic
    Cleo,
    I am not sure your question has much to do with debt recycling.

    It seems all you are doing is replacing your margin loan (which is secured against the shares themselves) with a separate loan that is secured against a property.
    As long as it is a separate loan from your home loan (both secured against the home) then there should not be an issue.

    It is the purpose of the loan itself that is the issue for tax deductibility.

    There are obvious benefits of moving away from a margin loan in today's volatility, let alone cheaper rates.
    Set up 2 separate loans from the start to make it very clear as to the purpose.
    Greg
     
  3. cleo

    cleo New Member

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    Hi Greg,
    Not sure you understood my question.

    - have margin loan (secured against shares)
    - buy PPOR with bog standard home loan
    - following a debt-recycling strategy each year I would draw down what I had paid off the home loan (non deductble) to pay off the margin loan (deductible).
    - my question is whether paying off an investment loan via the home loan counts in the same way it would if I used that money to buy shares direct?

    Can you elaborate on the 2 separate loans business? 20% deposit + 80% LOC?

    Thanks.
     
  4. GregR

    GregR Reid Consultants

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    Location:
    Berwick Vic
    Cleo,
    I understood your question.
    If you think what you have described as debt recycling, then you have got it the wrong way around, you use investment income to pay down non deductible debt, not draw down further on non deductible debt to pay down an investment loan.

    Why I am suggesting is 2 separate loans, which are secured against your home, is that you can have a home loan of say $300k and you have a separate 'share' loan of $50k and the purpose of the two loans is very clear and easy to account for in relation to interest.

    The new 'share' loan is simply replacing an existing margin loan and should be regarded the same way with interest costs deductible against income.

    That presumes you have a sufficient deposit to be able to fund the 2 loans secured against your new home.

    I hope this helps.
    Greg
     
  5. cleo

    cleo New Member

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    Location:
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    Hi Greg,
    I don't want to get into semantics, but "debt recycling" as I understand it, refers to transferring non-deductible debt into deductible debt. All the income from the share portfolio will go towards paying off the house (then redrawn to pay off the margin loan hence making the loan against the house tax deductible). The only difference is that in this case the shares came first and they are geared.

    The gearing for both the shares and property is moderately conservative.

    I am going through the process of deciding whether it is better to use this strategy vs selling the shares and buying the house outright. Since shares are down and Australian property is still expensive I don't really want to sell shares now, but I do need somewhere to live!

    Thanks for your help
     
  6. Terryw

    Terryw Well-Known Member

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    Location:
    Sydney
    I think I see what you are getting at.

    Income from the shares will be used to pay down the personal loan against your home and then reborrowed and reinvested in shares to create more income to help pay off the home loan.

    When taking money from redraw each withdrawal will be considered a new loan. The interest on this new borrowing will be deductible, generally, if you use it to invest.

    The trouble is you will have one loan with part of it investment and part personal. So when you make the next repayment part of that repayment must come off the investment portion and personal portion in accordance with the percentage split at the time. This will get increasingly complicated and won't be ideal as you will be repayment investment debt too.

    eg. $100,000 loan with $95,000 home loan and $5,000 investment = 95% and 5%. Next month you pay $1000 into the loan. 95% of this $1000 would go to the home loan portion and 5% off the investment portion.

    A way around this is to set up a new split each time you want to pay off part. This is not ideal if you will be putting money in each month. So maybe you could save up the money in a 100% offset account and then every 6 months pay it into the loan and then create a new loan (separate account number).

    Or do it now by setting up 5 splits on the loan. say one big one with an offset and 4 small ones of about $10,000 each (maybe too low for the lenders though).