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Tax Deductibility of IP Investing Strategy

Discussion in 'Real Estate' started by Redman, 6th Aug, 2009.

  1. Redman

    Redman Member

    23rd Jul, 2009
    Adelaide, SA
    Hi All,

    Just setting up my loan structures and wanted to ask about tax deductibility of interest.
    What I have done / am proposing to do:
    - Have 1 PPOR and 1 IP
    - Have 1 IO loan on PPOR (with offset account), 1 LOC secured by PPOR, and 1 IO loan on IP
    - IP IO loan is for 90% of IP value
    - LOC covers 10% IP deposit, buying fees, maintenance, etc (all IP running costs)
    - PPOR loan interest comes from offset account

    Proposing to:
    - Deposit all rent from IP into PPOR offset account, reducing non-deductible interest
    - Pay IP IO loan interest from LOC
    - Pay LOC interest from PPOR offset account (hence not let it capitalise)
    - (ALSO, because my limit is not huge on the LOC, I will most likely contribute the rental amount from the offset account towards the LOC at this stage, so the LOC is effectively only covering the -'ve gearing shortfall. In future, I'll increase LOC limit and stop contributing the rent, hence reducing non-deductible interest even more. Not sure, but I dont think doing this will affect anything ATO-related)

    Therefore, IP IO loan stays the same amount, LOC grows, but not because of capitalised interest.

    As far as Part IVA goes, I'm doing this to afford a lower rental return, higher capital growth property for my next one (ie need more cash flow to do this, not just trying to avoid paying tax)

    Should I be able to claim tax deductions on all IP IO loan and LOC loan interest?
    Does this distance me from all the confusion of deducting capitalised interest?
    Any feedback or other suggestions would be great!

    Also, thanks for all the other info I've been reading! Very useful. Good to see we're all in this together:)!
  2. Billv

    Billv Getting there

    15th Jul, 2007
    Sydney, NSW

    I am not an accountant but IMO as long as all your IP income goes in the LOC which is used to cover the IP expenses there shouldn't be a problem with your strategy.