Claiming PPOR Home Loan against Taxable Income

mrvaluepack on 22/11/2021 - 07:47
Last edited 22/11/2021 - 08:32

Been reading about debt recycling and ways I can take advantage of current low interest rates. To the mortgage brokers or accountants out there, I'm interested to see whether the below would be ok?

Example:
PPOR Market Value: $2m
Cash savings & liquid investments: $5m
Current loan: $1m fixed @ 1 yr no offset or redraw. (50% LVR)
Refinance into new loan: $1m variable with redraw and extra repayments
Use cash & liquid investments to pay off $999,999 of the new loan.
Redraw the $999,999 immediately and rebuy liquid investment assets.

Questions:

  1. With the example above, can I technically start claiming the new offset loan rates against my taxable income?
  2. Am I able to perform this with an offset account instead of a redraw facility? Eg: deposit $999,999 into offset to show on statement and withdraw immediately
  3. If I do refinance the new variable loan in the future, do I need to perform this "wash" again or is that $1m loan already considered used for investment purposes forever?

Any advice or help is much appreciated.

Thanks.

Financial

Comments

  • Donaldhump on 22/11/2021 - 07:57
    +17

    seriously if you have that much money, take the day off and go see an accountant.

    but since your after unqualified ozbargain advice this is my brief understanding of it

    if you borrow against your ppor, its what you borrow money for that determines tax deductability.

    1.) borrow money for shares its tax dedutable
    2.) borrow money for new house that becomes IP then tax dedutable
    3.) borrow money for new house and you move into then not tax dedutable.

    this is not financial advice, I am unqualified

    • mrvaluepack on 22/11/2021 - 08:11
      -3

      Those numbers in the example may or may not be skewed in either direction.

      Its borrow money for existing PPOR but if you say to the lender you want a line of credit (investment loan) to unlock home equity, the interest rates are more than double. I want a way to be able to use the sweet 2-2.5% rates right now for investment purposes.

      • OpenHand on 22/11/2021 - 08:19
        +2

        You need to split your loan, and use only one split for investment, nothing else. As soon as it gets contaminated with home repayments or similar then you have a major issue that needs a lot of accounting time to clean up.

        • mrvaluepack on 22/11/2021 - 08:22

          So better to take interest only home loan, put down extra repayment of $999,999. Split home loan into $1 and $999,999?

  • mskeggs on 22/11/2021 - 08:27
    +3

    Short answer is yes, you could treat your home as an investment property, but you would be liable for CGT when you sell.
    I’ve never heard of anybody doing this, as the CGT tax penalty would dwarf any tax benefit of claiming the interest.

    • mrvaluepack on 22/11/2021 - 08:31
      +1

      No, i believe this strategy doesnt count or transform your PPOR as an investment property. Its supposed to utilise your home equity for investment (income generating) purposes and swap "bad debt" into "good debt", thus making the interest rates on that deductible.

      • SmiTTy on 22/11/2021 - 09:28

        I agree with this. If you're not turning your ppor into an investment there is no cgt.

        Turning loan account into investment related is different from turning your house to an investment

  • avoidfullprice on 22/11/2021 - 08:34

    immediately and rebuy liquid investment assets.

    If this investment would trigger CGT or carry forward losses, you would be doing a "wash sale" in ATOs eyes.

    I'm also unqualified.

    • mrvaluepack on 22/11/2021 - 08:38

      I believe ato "wash" rules are to prevent people from claiming CG losses, I'm actually the opposite as I wouldnt be taking a loss and would be paying a massive CGT on those sales as they are up by quite a lot. It'll hurt at the start but benefits to be able to deduct interest rates from income over the long run would be worth it.

      • Seraphin7 on 22/11/2021 - 11:31
        +1

        Yes, a "wash sale" is only problematic if you are triggering a capital loss.

        Surprise, surprise, the ATO doesn't care if you do a wash sale to trigger a capital gain.

        That said, there is no way I'd trigger a "massive" CGT bill here. Using your numbers of $1m in sales to fund the mortgage paydown, I'll assume your CGT liability is potentially in the realm of $100k - $200k. If you then get a tax deduction on $1m worth of debt, the interest bill will likely be ~$25k p.a., of which you can get an actual tax rebate of up to ~$12k p.a. At $12k p.a., that's a looooooong time to get payback on the $100k - $200k upfront cost.

        • mrvaluepack on 22/11/2021 - 11:45

          Good point but at 12k pa and 100k upfront cost, thats around 10 years payback. Not too bad considering I plan to live in that home for more than 10 years.

          • avoidfullprice on 22/11/2021 - 13:27
            +1

            @mrvaluepack: Don't forget about ScoMo phase 3 income tax reform, so your tax benefits would be just 8k p.a.. unless of course your salary is over 200k

  • SmiTTy on 22/11/2021 - 09:23
    +3

    Yes if u pay off your loan and redraw for investment purposes, that loan becomes tax deductible.

    Lots of other considerations, but to your question, the answer should be a yes

    Second it needs to be your actual loan account and not the offset. Offset is considered totally different account to your loan and unrelated (from a tax perspective even tho the bank links them and you receive interest benefits)

    Thirdly, no need to "re wash". However you need to keep evidence to show this account is for investment purposes. Even if you're audited in 10 years time

    (not tax advice, not qualified, speak to accountant etc etc etc)

    • mrvaluepack on 22/11/2021 - 09:34

      Thanks, so redraw facility is a must then and a statement showing the loan was historically paid down before even after refinancing multiple times.

      Have you personally used the debt recycling strategy before?

      • idjces on 22/11/2021 - 10:28
        +1

        What SmiTTy said. I have multiple splits. I pay off a split completely so $0 is outstanding. Then I ask my mortgage provider to redraw the full amount to my brokerage account, and then use the funds to purchase shares. I calculate interest deduction's from the date I purchased the shares, to make recording easier.

        If I get audited, my mortgage clearly shows it was paid off, and the trail of funds that lead to the investment purchase.

        edit: the ato website has a bunch of topics on deductible vs personal use loans which you can look up

        • idjces on 22/11/2021 - 16:16

          Oh, another point to consider, these deductions may only be assessible against the dividend and interest income they generate, this could be segregated from other income sources. It may not be claimable against your wage income.

          Typically my dividends have always been higher than my interest expenses so I didn't pay close attention.

          dyor/speak to an accountant

      • weezlebub on 22/11/2021 - 10:31
        +1

        you might want to be careful, my fix term loan only allows 10k of additional repayments per year (otherwise you get penalties and lose your fixed rate)

        • mrvaluepack on 22/11/2021 - 10:50
          +2

          Yeah, thats why i'll refinance to variable which usually allows unlimited additional repayments and redraws without penalties.

      • SmiTTy on 22/11/2021 - 14:35
        +1

        Yes I have. I've paid off 100% and redrew everything. The only reason you would leave $1 is because some caution that some lenders might close off your account once you've paid it off (I think…. I've got no experience with that)

  • rektrading on 22/11/2021 - 09:47

    Cash savings & liquid investments: $5m

    What are the liquid assets?

    People can take out an ELOC using stonks and lending platforms using digital assets.

    There the interests are very low between 0.59% APR and 2.75% APR.

    • mrvaluepack on 22/11/2021 - 10:48

      Source for 0.59% APR and 2.75% APR on ELOC?

      • rektrading on 22/11/2021 - 10:50

        I don't use ELOC. The rates are for lending platforms.

        • mrvaluepack on 22/11/2021 - 10:52

          Which lending platform is offering those rates to non-sophisticated investors?

  • deme on 22/11/2021 - 14:25

    Claiming PPOR Home Loan against Taxable Income

    No.

    Why what if

    No.

    But…

    Just wait till rektrading tells you to get out a billion dollar loan to avoid tax.

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