Ask Ban Tacs Question
What are the tax implications of using redraw monies from a principle place of residence loan to secure an investment property as a contract deposit and then using the proceeds from the investment property loan to reimburse the principle place of residence loan?
I remember reading a caution emphasising the need to keep both loans and monies associated with these loans completely separate.
Is a deposit bond a more suitable arrangement to secure a contract for an investment property?
Answer
I can’t see how a deposit bond would be easier for your average property investor. I have only ever seen them used to buy off the plan because the deposit will be sitting there for a long time. Under normal settlement arrangements I doubt they would be cost effective. And unlike organizing a loan for the deposit you will not be entitled to a tax deduction for the cost obtaining the deposit bond (Reference PBR 80364) nor is it considered a borrowing expense but the interest will be tax deductible (Reference PBR 65790). The cost of setting up the deposit bond can be included in the first element of the property’s cost base (PBR 33799).
Nevertheless you are right to be concerned let’s say you owe $80,000 on your home at the moment and you draw $20,000 for a deposit just out of the redraw facility (not offset account). Now 20% of the interest on that loan is tax deductible but any repayments have to be apportioned on that basis so if you borrow $20,000 later on and put it into this account 80% of it will be considered to pay off your home loan this means only 20% of the interest on the new loan will be tax deductible. The only way around this is to organize an $80,000 loan and another $20,000 loan and pay them both off the original loan at the same time. Then the $20,000 loan would be fully deductible. Of course the best outcome is to do this right from the start. Organise another loan with the bank for the deposit using your home as security. It may slow you down but you can organize this before you find a house and organizing a deposit bond would slow you down as well.
Please make sure you read our claimable loans booklet in the Freebies section so you fully understand how to protect the nexus between the money you borrow and the deductible use.
