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Redraw off mortgage to pay investment property bills

Discussion in 'Accounting, Tax & Legal' started by TeeAre, 2nd Dec, 2016.

  1. TeeAre

    TeeAre New Member

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    Hello,
    I've been trying to find some information re redrawing on the ATOs site to no avail. I have a basic mortgage on a home that was my residence until circumstances changed. I now rent the property out, and live in a rental property myself.

    Some months are tough, like this month when my washing machine broke down. I want to know if I am able to redraw from my mortgage to pay bills for that investment property. Eg when my next rates bill comes, can I redraw to pay it? Can I total up expenses for one month, including real estate management fees, and redraw that? We are a single income family, but split investment income and expenses as property is in both our names.

    I saw a basic accountant five years ago when we first started renting the property out, but I suspect the accountant was not a property specialist, and was not given any helpful advice at all. I now realise we should have had a property valuation carried out at the time, also. Also, someone at Centrelink unofficially told me I could claim the investment income and hubby could claim the expenses, but luckily I checked that one with the ATO as that is NOT the thing to do!

    I'd appreciate any and all advice, and understand the advice does not take the place as that provided by an accountant. Thanks, Tee.
     
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  2. Hodor

    Hodor Well-Known Member

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    hodor
    You can redraw, I'm guessing you want to keep the interest deductible.

    Is there any chance you will be moving back in in the future?

    I am not completely sure so I'll leave it to someone else. I'd suggest posting this question on propertychat.com.au (sister site to this one) as there are people focused on property there so you might get the answer there.
     
    twisted strategies likes this.
  3. TeeAre

    TeeAre New Member

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    Thanks so much. Yes, I want to keep the interest deductible, as the loan is shrinking a lot.

    Unfortunately we won't be moving back. The property next door to it is a long term rental with a problem tenant. We left five years ago, so I think it is still out principal place of residence until next September.

    I will try posting on the sister site.

    Thanks again.
     
  4. Hodor

    Hodor Well-Known Member

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    It will be for capital gains purposes assuming you haven't claimed another place you own as your residence, so you could get the valuation done once that period is up, not sure the exact rules around the valuation and what happens if there isn't one.

    You should have been claiming the costs as deductible the entire time it has been an IP however.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Okay, unfortunately it gets really complicated when there are both personal and investment borrowings.

    First up, when you first took out the loan for the property - if you never made redraws for personal use, then once the property became available for rent, at that point you should have been able to start claiming interest on that loan as a deduction.

    However, as soon as you start redrawing from that loan for personal use, it contaminates the loan and it becomes a real mess to account accurately for which portion of interest paid is investment related.

    From what I'm gathering, you've never made any redraws until now - so provided that the bank will actually allow a redraw, you should be fine to redraw money to pay expenses for your investment property (but never for your personal expenses!).

    Do you have an offset account associated with that loan? Can you get one? An ideal way to manage this stuff is to have an offset account just for the investment property and have all rental income paid into it and all rental expenses paid out of it. If you can also get a credit or debit card associate with that account, you can use that to pay rates and other investment related expenses and it all stays nice and clean from a tax perspective (no contamination).

    If an offset account is not possible, can you get a debit card attached to the loan directly for redraws? You could then use that to pay investment related expenses.

    The trick is to clearly show that the funds redrawn from the loan were for investment related expenses and not personal expenses - you can get yourself into difficulty if you pay yourself back for investment expenses you've paid out of your own pocket when it might be questioned by the ATO whether it really was investment related or could be construed as a personal expense.

    If the only choice for redraw is to have funds deposited into your personal bank account - you'll need to get advice from your accountant as to what is the appropriate way to handle this to ensure you don't get into trouble if audited by the ATO.

    I hope this helps a bit - from what I gather you may have some options.

    Definitely explore the offset account option - rather than paying extra off the loan, pay into an offset account, which saves you interest costs, but retains the loan balance so that if you ever do need to use that money for personal expenses, you can use that money in the offset account without it being considered an increase in the loan.

    You can also look into debt recycling - do you have any personal non-investment related debt? If you have a lot of redraw capacity in your loan, you can pay all your investment expenses from your loan, but have all your surplus rental income (beyond that required to make the minimum loan repayment) used to pay off your other non-deductible debts. The key is to minimise the amount you pay off the investment debt and maximise the amount you pay off personal debts.

    There are even more aggressive strategies involving capitalising interest on the investment loan - but they require good advice because they can get you into difficulty if not done correctly.

    I hope this helps.
     
  6. Terryw

    Terryw Well-Known Member

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