redraw from IP to IP

O

oPen77

Hi everyone. I will be seeing an accountant in a few weeks but was hoping to get some info if I can...

We currently have some money tied up in a redraw facility on IP1 and are considering selling IP2 in the next year to help buy a PPR. My question is can I transfer this amount from IP1 to IP2 while it is still technically an investment property, and then once IP2 is sold use this amount toward the PPR? Would that cause a tax issue with being able to claim the interest on the full amount owing on IP1?

I am interested to hear your thoughts. Thanks :)
 
I have just spent a bit of time assisting a client sort out a mess with a handful of IP's all with one loan. Add a non-deductible element (ie redraw to buy a car) and its a disaster. Do it several times and its a catastrophe.

Forget what your loan security is....Loans can be secured against your parents home and it doesnt give them any deduction if you own the IP. Its how YOU use the $$$ that determines deductibility. Once you get that concept clear it will assist all decisions about loans.

Every time you "redraw" its considered a new loan. If you use the money for a deductible purpose (ie Buy IP3, pay for improvements on a IP, pay outgoings on a IP etc) then the proportion of inteerst on the new loan amount is also deductible against the INCOME to which the loan use was made. So if its a non-decductible borrowing you can end up tainting the original deductible. Sub accounts assist to quarantine this. Your accounta can guide this.

If you redraw on IP1 and credit the proceed to IP2 in the absence of anything else you are refinancing a part of the existing IP2 loan. ie loan was $200K you redraw $200K on IP1 so its a refinance. No deductions change.

If you sell an IP think carefully about how you deal with the cash. If you park the $$$ in the IP1 or IP2 loans and later redraw its how you use the $$$ later that determines if its deductible. eg : Redraw and buy IP3...That new loan interest is deductible against IP3. But when you credited to the original IP you reduced its deductible. So net effect = zero. If I were in that position and I had a non-deductible home loan (PPOR) I would park the $$$ to that loan. Then redraw a new amount on sub account and now you have increased total deductible borrowings.

That a reason why so many discuss offsets v redraw. A good mortgage broker can assist this.
 
Thank you. There is some good information there.

unfortunately our broker gave us bad info regardind redraw, so we went with it. Can't change that now :(

If we redraw from one IP to another, i understand its pretty straight forward. I guess I am thinking that once we sell, the money would no longer be considere redraw, as it would be justmore money than would be needed to pay out the loan.

I think I will just wait until we talk to our accountant who will have all the details in front of him abd hopefully give a good assessment of our situation. I appreciate its hard with limited details.
 
The Y-man said:
Keep IP2, Sell IP1?

The Y-man
Click to expand...

That's not an option - we love IP1 - The house is really nice and it's in a town that we love and hope to live there some day..

I called the ATO and they said that it shouldn't be a problem as at the time of redrawing the funds, it will be used for generating an income, however I'll try and find a good accountant in the next couple of weeks to help out :)

Thanks for your help.
 
oPen77 said:
I called the ATO and they said that it shouldn't be a problem as at the time of redrawing the funds, it will be used for generating an income, however I'll try and find a good accountant in the next couple of weeks to help out :)
.
Click to expand...

This is completely incorrect.

The money 'moved' to IP2 will be considered a new loan. It doesn't change deductibility of interest. So IP1 may be the security but IP2 will be the purpose for which they money was borrowed. Once you sell IP2 you won't be able to deduct the interest on this withdrawl loan. There will be no connection between the borrowings and any income (IP2 is gone now).
 
Terry_w said:
This is completely incorrect.

The money 'moved' to IP2 will be considered a new loan. It doesn't change deductibility of interest. So IP1 may be the security but IP2 will be the purpose for which they money was borrowed. Once you sell IP2 you won't be able to deduct the interest on this withdrawl loan. There will be no connection between the borrowings and any income (IP2 is gone now).
Click to expand...

Now I am confused... When I redraw, the loan would b going to IP2 which is still an IP at this stage. Wiould be possibly selling 6 months down the track (after current lease expires). So would that make a difference?

Thanks for helping.. definitely need to find a good accountant neaby
 
oPen77 said:
Now I am confused... When I redraw, the loan would b going to IP2 which is still an IP at this stage. Wiould be possibly selling 6 months down the track (after current lease expires). So would that make a difference?

Thanks for helping.. definitely need to find a good accountant neaby
Click to expand...

The interest would be deductible while the loan is used for the income producing property. Once it is sold there is no income and so the interest on that redrawn loan will not be deductible.
 
oPen77 said:
That's not an option - we love IP1 - The house is really nice and it's in a town that we love and hope to live there some day..
Click to expand...

It's bad practice to mix emotions and IP's - it almost always ends in tears.

For example - what happens if you get a dud tenant that absolutely thrashes the life out of the place?


The Y-man
 
Ok.. very interesting that the ATO told me the opposite of that :( Hope i find an accountant that knows what they are talking about. Its not a huge issue, I can keep the money in redraw at IP1.. it just would have been useful to find a way to use it toward a purchase of of a new PPoR in the coming year.

Thank you toeveryone for the info :)
 
The Y-man said:
It's bad practice to mix emotions and IP's - it almost always ends in tears.

For example - what happens if you get a dud tenant that absolutely thrashes the life out of the place?


The Y-man
Click to expand...

So far so good, but if it happens we'll worry about it then. Aside from that, its the newest addition to our portfolio, and we wouldn't get any profit out of selling, whereas IP2 would.
 
This is what I have learnt from reading other threads on SS. How about if OP open an offset account against IP1. When he sells IP2 then the money parked to offset account of IP1. The money on offset account can be used for PPOR, and the loan amount of IP1 is never changed and that is still deductible regardless there is money on offset acct or not. Does this sound correct?
 
Jolly123 said:
This is what I have learnt from reading other threads on SS. How about if OP open an offset account against IP1. When he sells IP2 then the money parked to offset account of IP1. The money on offset account can be used for PPOR, and the loan amount of IP1 is never changed and that is still deductible regardless there is money on offset acct or not. Does this sound correct?
Click to expand...

Not correct. The offset account doesn't change anything. The money borrowed from IP1 for IP2 would still be a loan and the interest not deductible once IP2 sold.
 
I think the ATO told you the thruth by what you wrote.

"I called the ATO and they said that it shouldn't be a problem as at the time of redrawing the funds, it will be used for generating an income"

The key point being 'at the time'. once its no longer generating an income you lose that deductability.
 
oPen77 said:
Ok.. very interesting that the ATO told me the opposite of that :( Hope i find an accountant that knows what they are talking about. Its not a huge issue, I can keep the money in redraw at IP1.. it just would have been useful to find a way to use it toward a purchase of of a new PPoR in the coming year.

Thank you toeveryone for the info :)
Click to expand...

You can 'keep the money in IP1'.

However, when you sell IP2 the redraw in IP1 will not be allowed an interest deduction unless the proceeds from the sale are used for another IP or shares etc. that earn assessable income.

So why do you want to shift the security to IP2 ?
 
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