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Increasing IP loan

Discussion in 'Accounting, Tax & Legal' started by Peza, 22nd Jun, 2010.

  1. Peza

    Peza Member

    18th Aug, 2009
    Parramatta, NSW
    Hi all,

    I have a question whcih I hope I can get some advice on in regards to increasing my loan amount on my IP.

    To begin with I will give you some background.
    I have two loans:
    - 1 for my IP. Property was purchased for $290K in 2003 and valued at the $360K mark. I currently have a $240K interest only loan on the property. Rental income at the moment is $380pw and is providing no negative gearing benefit.
    - Second loan is for my PPOR. Loan is for $500K but has $420 left on it.

    I have been to the bank today and was informed on a 'line-of-credit' loan for these two loans. The bank is willing to "re-balance" the loans so the IP can have the larger loan that will allow my PPOR loan to be reduced, and inturn allow me to negatively gear the IP property loan against the my income. The bank is willing to put a full $360K on the IP loan and the remainder on the PPOR loan.

    By my calculations,
    Income on rent is $19,200
    Interest only on $240K is $15,900
    Interest only on $360K is $23,900

    My questions is taxed based because I am not sure how the ATO will view this arrangement? Is it possible to just increase the loan amount against a IP just by re-financing and claim the negative gearing?

    Has anyone ever done this? or know of this being done?

    Sounds alittle to good to be true...

    Any comments would be appreciated.

    Thank you
  2. GregR

    GregR Well-Known Member

    13th Jul, 2009
    Berwick Vic
    Do not take the 'advice' of that bank.
    While they can rebalance the loans as they sound as if they are cross-collaterised, it will not stand up for ATO purposes.

    You can deduct legitimate expenses incurred in earning income. When you initially purchased your IP, the interest cost incurred on those funds invested to purchase the IP and related property expenses can be deducted against the rental income.

    What the bank is suggesting goes beyond that where by re-allocating the loans against the two securities, they suggest the new higher loan amount can now be used to calculate interest against the rental income. It cannot be as the purpose of the original funds borrowed was to purchase your PPOR and the interest cost for that loan amount is therefore a private expense and cannot be claimed.

    It also astounds me that I know many accountants also say that it can be, unfortunately they simply do not understand tax law as it relates to property investment.

    Find a good tax accountant who understand property tax.
  3. Rob G.

    Rob G. Well-Known Member

    6th Jun, 2007
    Melbourne, VIC
    As Greg said, you will end up with still only $240k for which interest is tax deductible.

    And the bank has benefitted by a cross-collateralised loan so it can recover more of your property should there be a default.

    Of course, if you needed to borrow more money to purchase further investments then this might make more sense.


  4. Peza

    Peza Member

    18th Aug, 2009
    Parramatta, NSW
    Greg / Rob,

    Thank you for your replies.

    Your comments are as i expected, and not as the bank represented the restructure.