Accountants like us are beside you as you venture forth to become a property purchaser.
Whether it is for your main residence or for an investment, we see the ups and downs of the process, including the common mistakes that often are made.
Let’s talk about refinancing and the type of loan that you have on a property. This is important if you have borrowed to buy your main residence.
Bank managers and brokers love to recommend mortgage consolidation – wrapping all your loans into one easy-to-manage loan. It makes sense to do so. But if tax ever comes into play, it can be a disaster.
This is because, from a tax point of view, every time you draw on a loan you are considered to have a new loan. You need to look at the purpose of that new loan in isolation.
If you have a car loan, a home loan, and a credit card, all of which have different purposes, it is easier to look at the purpose of each of those loans. However, if you consolidate those three loans into one, then the purpose of that new loan is split proportionately to those three separate purposes.
If you never intended to claim a tax deduction for any of the interest on the loans, it’s no problem. But what if you want to move out of your property, rent it out and now claim a deduction for the interest on the loans? It must be apportioned, and the credit card cannot be paid off separately from the home loan.
Let’s say you have a home loan and are paying it off consistently. In this hypothetical situation, you want to buy a new home and rent out your old one. A big loan for the new home is needed, and you will only have a small investment loan on your old home. The investment loan can’t be redrawn back up to the maximum. The redraw amount is non-deductible, and you would have to proportion the interest on the loan to what is deductible and non-deductible.
You may have been better off paying all your extra cash into an offset and redrawing from the offset. Your old loan was used to buy that property, which is now an investment property.
The worst thing that can be done is getting a line of credit. Every week, drawing a new amount is considered a new loan from a tax point of view. Many mortgage advisers may promote these types of products.
However, as accountants, we can only comment on the taxation aspects. If you have a line of credit that is constantly paid in and redrawn, there aren’t really any investment purposes for that loan. An audit by the ATO would almost certainly disallow any income tax deductions for interest.
Two separate loans, both of which are investment loans, may be a better option (depending on your circumstances). You may convert one investment into a personal use asset or may even sell an investment.
Let’s say you have a $500,000 loan split between two $250,000 investments, and you sell one investment. You must pay the loan off, so $125,000 will be allocated to the other investment loan. You will now have a $250,000 loan; only half is for current investment purposes.
Receiving advice from a mortgage broker or your bank manager regarding loans is advisable. Still, we recommend speaking with us before finalising any mortgage structure to determine the tax implications. Why not see how we can help you?
