Deductibility of surplus funds on settlement of IP

Hi everyone,

Question about deductibility of interest.

I've borrowed effectively 110% for an IP purchase (via securing with the equity in my PPOR).

100% for the IP
5% for stampduty + costs
5% surplus

What should I do with this surplus to ensure interest deductibility?

At first thought was to put this into an offset account against the IP.
I would park the cash here until I need it for maintence, repairs and/or renovation of the IP.

Any feedback is appreciated.

Regards,

Hi mnguyen & welcome!

I'm sure the finance wizards on here will be able to help you...sorry I'm not one of them

I'd be interested to know if you could park the extra funds in a LOC too?

Regards,
M&M

You would have to park the funds into the loan account for this or another IP, not an offset to maintain interest deductibilty.

But you are right, you can then use the excess funds to pay for those expenses. Another option, if you have another IP (say IP2) loan, place the excess funds against that loan and have the loan payments for this IP1 drawn from the loan account of IP2 for the time to use up those funds. The loan amounts that you would normally have to pay for this IP1, you could then use alternatively to pay down non-deductible debt eg credit card, PPOR mortgage. Of course you would then need to change back direct debit details once the funds are exhausted.

buzzlightyear said:

You would have to park the funds into the loan account for this or another IP, not an offset to maintain interest deductibilty.

Click to expand...

Thanks for the reply. I had similar concerns and may opt for the prudent approach of putting the cash back into the loan.

Just thinking more about the situation. Take the following:

Total loan is $110.
$100 is clearly used for investment purposes
$10 is in an offset.

Effective interest is $7p.a. on $110 @ 7%p.a.
Logically, you are charged 7% on $100, not $110.
Since $100 was used for investment purposes, the whole $7 in interest is deductible.

Has anyone else done something similar? Or is best to avoid the risk?


Main reason for going down this path is for convenient access to the funds since the offset account is also a transaction account.

Regards,

the offset would be ok if its against deductible debt and you dont mix these borrowed funds with personal or tax paid funds.

Indeed best to not make any transactions from the acct unless they are for deductible purposes.


Be aware that some IO loans may not have redraw facilities,so pls check b4 making that assumption

ta
rolf

Im in a similar situation to the OP.

It's my understanding that (from an interest deductibility perspective) you cannot use the surplus funds to make repayments to the loan.

Is that the case?

Ta,
Natalea