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Increasing IP Loan and Redraw Facility

Discussion in 'Accounting, Tax & Legal' started by confucius, 4th Nov, 2008.

  1. confucius

    confucius New Member

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    Hi
    I am new to the forum and hope to get some advice/ thoughts from the more educated ones in financial matters.
    My situation is:
    1 . We have a redraw facility of $180k on IP loan that started at $265k
    2. We need about $230k to knock down and rebuild the home we live in

    Can i borrow $50k (230 - 180) on the IP and use it towards rebuilding the house we live in. Will the interest be tax deductable.

    Also, when I redraw the $180k my interest payments will go up again. Will the ATO question this and will I be able to use this $180k

    Many thanks in advance

    I do my own tax returns and cannot really ring up an accountant and ask
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So if I understand you correctly ...

    You have a PPOR and an IP.

    The IP loan has a redraw facility that would currently allow you to redraw up to $180K

    You need $230K

    You are planning on borrowing an additional $50K from somewhere fund the shortfall from your redraw facility.

    Is that right ?

    Where will the $50K come from ?

    Whether you could borrow the money against your IP would depend on the amount of equity you have available and whether you have the servicability to extend your IP loan further.

    The interest would NOT be tax deductible as the purpose of the loan is personal expenditure (your PPOR) and not investment related.

    You cannot claim the additional interest paid since it is not investment related - you are effectively tainting your investment loan by redrawing it for personal use. The accounting for this can get very messy - especially if you may payments into that loan or worse, if it is a P&I loan. Proceed with caution!

    I know you probably don't want to hear this, but given your plans, I really do strongly suggest that you get yourself a good accountant who is familiar with real estate. Your tax situation is about to become very complicated if you go down this path, and the ATO is being very strict on this type of situation now ... you are likely to get audited at some point and the penalties can be severe.

    Once you get to a certain level of complexity with your finances - an accountant is almost a necessity to avoid getting into trouble with the ATO by making mistakes with how you structure things.
     
  3. confucius

    confucius New Member

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    Sims
    thanks for your detailed reply. Most probably i willtake out the loan on the PPOR with IP as a security. ie let go the deductions but have only one property with the bank as security
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, given there aren't any deductions to be had for the new borrowings, then it will possibly be simpler all around if you can borrow all the money against your PPOR.

    If you are able to, you could also look at changing your IP loan to interest only (if it isn't already) and pay only the minimum you have to on it. Then redirect all spare income to reducing your new PPOR loan. Only use your IP loan redraw facility for investment purposes.

    For future reference, if you had used an offset account rather than a redraw facility against your IP loan, then you would have been able to extract any additional cash you have put into that offset account to put towards your new PPOR, without affecting the deductibility of the IP loan (and the IP loan amount would still be high, giving better deductibility).

    Lesson: redraw on IP loans = bad. Offset acounts = good.

    Hope this helps!
     
  5. confucius

    confucius New Member

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    Hi Sim
    What if I move the extra payments I have made into a MISER (mortgage offset) account
    Thanks again
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Unfortunately, what is done is done ... you are already deemed to have paid off that portion of the loan. Any redraw you make now (even if just to move into an offset account) will render that part of the interest on the loan not deductible if it is not used for income generating or investment activities