Author – Graeme Salt
What’s the best way for a property investor to drive their accountant bananas? By mixing personal and investment debt. It makes it almost impossible to get a borrower the best tax return if it’s not clear what debt is tax deductible.
This week a client called me who was looking to convert his current home into an investment property; in doing so, he wanted to tap into the equity in his existing property to provide a deposit for the new home.
The client had done a great job in paying down his loan while he lived in the property. But, he was disappointed when I told him that, if he increased the debt, to ‘borrow’ the deposit for his new place, the new borrowings would not be tax-deductible.
Top-up loans are great ways to tap into the equity of an existing property, if you want to invest elsewhere. But, sometimes, if you are have having to go down the route of a top-up, it means you have not structured your debt tax effectively.
If you have a Principal Place of Residence that you think you may want to turn into an investment property, its prudent to focus on the offset account rather than pouring your money into redraw.
Taking money into and out of a loan confuses the beejesus out of your accountant (who is responsible for showing what debt is investment debt and what is personal). It can also prompt some very tough questions from the Tax Office.
Changing the nature of a loan from owner-occupied to personal is fine but to avoid confusion, use your offset to keep funds separate.
With tax time upon us, now is a good time to structure your finances effectively. If you want to discuss, structuring your loans, please contact me on 1300 30 67 67.