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Investment property purchase with offset funds

Discussion in 'Real Estate' started by GunnerGuy, 5th Oct, 2008.

  1. GunnerGuy

    GunnerGuy Index & Property Investor

    Joined:
    26th Sep, 2008
    Posts:
    65
    Location:
    Kuala Lumpur, Malaysia
    All,

    My first post to this forum. A general question to those that know about Investment Property purchases and their tax efficiencies.

    Current Situation:

    PPOR: 100% equity, no loan, thus no repayments.
    PPOR not considered in this scenario and not for use as a cross security.

    IP: Owned 7 years, just refinanced with another bank. No cross –securitisation with PPOR, ie. IP loan is standalone, and I do not want to cross-securitise.

    IP-A Value = $1M
    IP-A pre-refinancing loan = $150K
    IP-A new Loan = $400K
    IP-A Loan = P&I at 8.5%
    IP-A Loan repayments are about $1,200pm (on original $150K)
    IP-A Offset = $250K cash in bank.
    IP-A - Costs greater than income with cumulative losses added to my tax return for the last 7 years.

    I want to buy a second IP. What is the best way to maximise my tax efficiency.

    The second property (IP-B) will be standalone and not cross-securitised.
    IP-B purchase price = $700K

    If I use the cash in IP-A offset as a deposit for IP-B can I still claim the Interest payments incurred on this $250K as costs against IP-B as tax losses or even claim them against IP-A costs? I presume I cannot offset these losses against IP-A, but can I offset against IP-B ? The reason to consider this is :

    1. LVR is reduced for IP-B, and thus giving me increased equity ownership.
    2. Reduced IP-B LVR will avoid mortgage insurance.
    3. I will receive better interest rate on IP-B loan due to lower LVR.

    Joe.
     
  2. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Joe,

    I understood that initially you borrowed these $250K funds with the aim to use them for further investments.
    Is this correct or do you have your own savings in there as well?

    You could use all $250K or as much as you need to achieve your goal which is a lower interest rate and/or not to pay mortgage insurance.

    The interest for the $150K of IPA and the $250K of IP-B will be charged against the loan of IPA but your accountant could split the amounts on a percentage basis.

    I'd change the loan of IPA to IO.
    What are you going to do with the shortfall between rent and interest?

    Cheers
     
  3. GunnerGuy

    GunnerGuy Index & Property Investor

    Joined:
    26th Sep, 2008
    Posts:
    65
    Location:
    Kuala Lumpur, Malaysia
    Using offset for deposit

    BV,

    Thanks for your reply. No I do not have any of my own money in the IPA offset. I increased the $150K loan to $400K when I refinanced to get $250K cash to use as I wish.

    My lender has offered me the same interest rate as the other loans up to 100% without any mortgage insurance. So to buy IPB for 700K I have 2 options:

    1. Buy IPB with a 100% new loan and still have $250K cash for whatever I want, or

    2. Buy IPB with say 20% deposit ($140K + 'expenses') giving me 20% equity and still $110K cash for whatever.

    The rental shortfall will be entered as a loss on my tax form and accumulated over a few years to help reduce capital gains tax when I sell IPA or IPB. I have alternative funds ;) to cover the cash flow shortfall.

    Joe.
     
  4. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Joe

    If you have been offered 100% finance with the same interest rate and no LMI then go for it and leave IP-A and the offset account alone.

    You seem to be in a good financial position.
    If it was me, I would convert the offset account to a separate LOC and use those funds to progressively buy Oz shares.

    Some Oz banks and resource/iron ore stocks look very cheap right now and even if the share market hasn't hit rock bottom yet IMO we are not far from it.

    You could also spend the $140K or so for the purchase of IP-B and leave the remaining funds in the IP-A offset account.

    If you do this, keep a paper trail so that your accountant can work out the percentages and so that the ATO can see where the money was used.

    Working out the interest for each IP is not problem if your loans are IO
    but it gets complicated if you use the money in the offset for other things.

    Cheers
     
  5. GunnerGuy

    GunnerGuy Index & Property Investor

    Joined:
    26th Sep, 2008
    Posts:
    65
    Location:
    Kuala Lumpur, Malaysia
    Bill,

    Thanks for your advice/comments.

    I spoke to my Bank and Accountant and they both suggested as you did. I just wanted to check in an "unbiased forum". Take 100% loan for IP-B and keep the cash for whatever. Tax implications are tricky with P&I but can be done for tax efficiency with accurate paperwork. I prefer to keep to P&I on IP's so that I am increasing my equity and reducing debt gradually.

    Accumulating losses over time to reduce Capital gains iin the future is good, however one only gets one's marginal rate back. Any Interest saved (through reducing principal) is just that .... saved.

    As for using the cash ..... shares look cheap but volitility and uncertainty are still in the market. I have never really been risk averse, however I have been over the past 6 months and getting 8.5% (Net / after "tax") in the offset is pretty good for me at the moment. I am, however, looking very closely at stocks at the moment.

    ..... The ASX must go up more than 8.5% in the next 12 months, however to beat the 8.5% in the offset one has to include capital gains tax on 50% profit after 12 months, at ones marginal rate. Difficult decision.

    Joe.
     
  6. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Joe

    Using borrowed funds to buy shares is not a good idea atm but the situation is IMO about to change.

    The 8.5% you will pay to the bank for using their money will come from your dividents so any capital gains is a bonus.

    If you do decide to invest in shares remember to move those funds into a LOC
    or working out the interest will be very messy...

    Cheers