Tax Question on Deposit Paid for an Investment Property

Dr-StrangeLove on 09/11/2022 - 20:40

Me and my wife are planning to purchase an investment property for $800k purchase price. We have signed a contract and paid a deposit of $160k from our savings in an offset account and in the process of applying for a loan with the bank. Bank has evaluated the IP for 725k causing us a valuation shortfall of $60k for an 80% LVR.

I was thinking of releasing equity to pay the shortfall from my owner occupied property. Bank has come back today that it should be ok to borrow additional $60k to be used for the shortfall. However I’ve learned that I can release a max equity of 180k with my current owner occupied property for a slight raise in interest rates which I am ok with.

So my question is - can I get 180k equity released from the bank now and say to ATO at the tax time that I used it for deposit for an investment so I can claim tax deduction for the interest paid on this new loan taken as part of equity release?

I was thinking since I used my savings first for deposit and then raised the equity, ATO might not allow me to claim tax deductions on the $180k. Is that understanding wrong?

Ideally I should have applied for equity first and then pay the deposit to keep things clean. However stupid me paid the deposit from savings first and then thinking of applying for equity. We didn’t have enough time to apply for equity as we needed to pay the deposit to secure the property.

Can someone with accounting or tax expertise help me out here with my understanding as I am considering taking a $180k equity hoping I could claim the interest as tax deduction?

Financial Tax

Comments

  • duk242 on 09/11/2022 - 20:49
    +9

    This is a good question to ask your accountant….

  • AndyC1 on 09/11/2022 - 20:54
    +2

    Sounds like you need proper real financial advice, so call your accountant or financial advisor (not your other half).

  • jizmo on 09/11/2022 - 21:09
    +6

    Your paying 75K over bank valuations?
    Seeing an accountant in today's environment would be the last thing I'd be worried about.
    Find a hit man to do a job on the agent who sold it to you

    • Ghost47 on 09/11/2022 - 21:14
      +1

      Maybe OP can just claim the loss on tax somehow.

    • Dr-StrangeLove on 09/11/2022 - 21:25

      It’s one bank that did this. I got a few more evaluations from other banks via broker. They valuated it for 800k. It’s just that I don’t have the time now to get the loan approval and I already have a loan for PPOR with the current bank so hoping the equity release shouldn’t take long time.

      Also other banks who valuated it $800k or close have a higher interest rates

      • jizmo on 09/11/2022 - 21:34
        -5

        Banks don't do valuations for free.
        how can you get multiple valuations and ask a tax question? strange most would think

        • bemybubble on 09/11/2022 - 21:35
          +3

          Banks don't do valuations for free.

          Yes they do. All the time.

          Unless it’s commercial

            • bemybubble on 09/11/2022 - 21:52
              +4

              @jizmo: If you’re the one who doesn’t know that banks for vals for free then I’d be inclined to think it’s you in mummas basement :)

                  • bemybubble on 10/11/2022 - 05:57
                    +3

                    @jizmo: Soz I kept living my life and went to bed as I thought we were finished. Thanks for playing though!

                    I feel so much more connected to you now through this experience. Can’t wait to grow together as a true OzB forum couple.

  • bemybubble on 09/11/2022 - 21:10
    +2

    So interest works on a purpose test.

    If you’re reimbursed the deposit funds then you will be asked what you will use those funds for? Assuming back into your private offset then it would be private and therefor not deductible.

    There are private rulings out there that support this however I also came across this which contradicts.

    https://www.ato.gov.au/law/view/document?src=hs&pit=99991231…

    I think the taxpayer got lucky with the above but you could at least refer to it should you roll the dice.

    If in doubt the correct way would have been to redraw on your home loan rather than use offset funds. Claimed that portion of the interest.

    • Dr-StrangeLove on 09/11/2022 - 21:23

      Thanks, that’s really helpful and the scenario is similar to mine. However, I do not possess any evidence from bank where they asked me to fund the deposit with my personal funds until they make a decision. I paid the deposit before reaching out to bank and learning about the equity amount.

      I’ll check with my accountant again on this. He mentioned that ATO might ask the deduction but we can challenge it. However I would like to get a second opinion before making a decision. Thanks again for sending the ATO link. Very helpful.

      • bemybubble on 09/11/2022 - 21:25
        +2

        To be honest the law is very clear in my view. I really feel the tax payer got lucky.

        Objectively I’d say you’re stuffed to be honest.

        However. Given that private ruling above I would have your accountant apply for one and cite that.

        • Dr-StrangeLove on 09/11/2022 - 22:01

          Yeah, I feel so too that it's too late now.

          I however would like to argue that we had a very little time to think about the loan and get approvals before we had to pay the deposit as per the contract. I'll reach out to a few accountants for advise on this. I'd like to be confident on the tax benefits if any before deciding to go with $180k loan as it significantly increases the monthly repayments.

          • bemybubble on 10/11/2022 - 01:19
            +1

            @Dr-StrangeLove: Well you just got one opinion from one. Never too late for a PBR. In fact it’s better doing it now.

            Bills in the mail son ;)

  • brendanm on 09/11/2022 - 21:14
    +5

    This whole thing sounds like a terrible idea to be honest.

  • Meho2026 on 09/11/2022 - 21:29

    You shouldve gotten advice before you went this far.
    For tax purposes you probably should've borrowed 100% of the cost of the investment property using your PPR as collateral.

  • boomramada on 09/11/2022 - 21:41

    You are investing on $800k property yet rather invest on Ozb accounting tips rather than a accountant?

    Next question, do I need insurance?

    • brendanm on 09/11/2022 - 22:17
      -1

      Next question, do I need insurance?

      Not if it's in a flood prone area, the taxpayer will pick up the bill for you.

      • boomramada on 10/11/2022 - 00:43

        More like not even a $1000 per person and list of social clubs that you can get help from ?

        • brendanm on 10/11/2022 - 17:56

          Disaster relief grant? House buybacks?

  • cuteduck on 09/11/2022 - 22:18

    You dont have to X-collaterise. You can split the PPOR loan 20%+6%(borrowing cost) and 80% (new loan).

    I won't touch the property that is valued 75k below the bank value. I would normally ask or demand for full valuation (not kerbside nor desktop)

    N.B. Your contract should have the clause of "subject to full bank valuation"

    • jizmo on 09/11/2022 - 22:58

      N.B. Your contract should have the clause of "subject to full bank valuation"

      More specific buyers bank "NAME" financing the loan. The vendor could use any bank valuation to complete the sale.

  • johndowy on 09/11/2022 - 23:23

    No. You did it in the wrong order unfortunately.

  • TheMindsetTraveller on 10/11/2022 - 00:50
    +3

    Firstly, using $160k from your PPOR offset account was a bad financial choice. What you have done is increased your PPOR loan which means you are charged (more) interest on the PPOR and that interest is not able to be deducted anywhere.

    Your goal is to have bigger debt (ie interest charged) on a deductible asset (ie IP).

    Secondly, you need to understand equity a bit better before you rush in and think its easy to just "use equity" or "increase your mortgage"

    If this was me, I'd borrow $800K + expenses for the IP and put my PPOR as surety. But that's just me.

  • larndis on 10/11/2022 - 08:39

    Not a tax accountant but this my understanding.

    ATO doesn't care what property the loan is secured against, only the purpose you use the funds for. An offset account is not savings. You borrowed that money and are now charged interest on it, and used it for an investment. The interest is therefore tax deductible, the fact is it secured against your PPOR is irrelevant.

  • hiancc on 10/11/2022 - 15:01

    I think you might be over thinking this.

    You purchased property for $800k plus SD, etc lets say $860k

    You put up $160k deposit, looks like from Offset related to you home loan. Increased interest no tax impact there.

    Bank says their property valuation $725, but are prepared to ignore that and give you investment loan of $860k less $160k = $700. The total $700k loan interest is tax deductible against rental income. The bank's valuation/lending policy is not relevant. It is the intention when you took out the loan that is important.

    I would not be taking out more from your home loan offset because that means more interest on home loan which is not tax deductible.

    The way I see it, I don't believe it's too late for anything. How you secure the purchase contract (deposit) is not important. Could be $10k, 10%, 20%, loan from family, key to your BMW etc. Just happens to be the terms of a contract to bind you to executing a Transfer of Land document to exchange title for money at agreed settlement date. It's what happens at settlement that counts. That's is when you legally acquire the property. If your mortgate broker can convince the bank to lend you the whole $860k (regardless of security required by the bank), it's deductible.

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