Ask Ban Tacs Question
Good morning, I have an investment property purchased in 2018. I have been paying extra payments on the mortgage so have 182,000 in the redraw account for the mortgage on this property. I want to know if the tax laws will allow me to redraw the 182,000 to purchase another property. This would mean the mortgage on the existing property purchased in 2018 would increase by 182,000 and I would use that money as a deposit for another property. This property would no be a new build so would not qualify for the same negative gearing rules as the existing property purchased in 2018. If I do this can I still negatively gear the increased interest charge on the property purchased in 2018?
Answer
The key here is what the borrowed money is used to buy determines whether the interest on the loan is tax deductible. The extra payments you made off the loan paid down the original loan. Any redraw will be fresh borrowings.
With a redraw facility you have paid off part of the original loan so when you draw the funds back out it is a new borrowing for whatever you spend that money on. Fortunately, it looks like the redraw will be for investment purposes anyway so still tax deductible but as it is not a new build and it is purchased (signing of contract) after 12th May 2026 it will not be able to be negatively geared after 1st July 2027. So, if the interest and other expenses exceed the rent you receive you will have a quarantined residential rental loss.
A quarantined residential rental loss can be offset against other residential properties that are making a profit. To this extent it does not matter which property the $182,000 is deductible against as long as the two properties combined (and any other residential rentals you have) breakeven or make a profit. What will hurt is if the overall result is still negative, then unfortunately, because the $182,000 was borrowed to buy a property after 12th May 2026 it is attached to that property so the interest on that borrowing can only be utilised up to the extent of your total rental property profits. The rest is quarantined for future offsets against residential rental profits or residential capital gains.
Note if instead you had made the extra payments into an offset account, which is a separate account from the loan, then a withdrawal from the offset account would not affect the deductibility of the interest on the loan it is attached to because the use of the borrowed funds remain the same, you are just withdrawing your savings from the offset account. Not actually touching the loan account.
If you do have an offset account, after 1st July, 2027 it is important to make sure it is offsetting either a non deductible loan or, if you have no non deductible debt, the loan for an established residential property purchased after 12th May, 2026. For example attach it to a loan for a property that does not qualify for negative gearing to reduce the interest there, increasing the chances of it breaking even.
In direct answer to your question only the interest on the loan to the extend that it has now been paid down to, is deductible against the 2018 property. The $182,000 will be considered borrowed to buy the current purchase so the interest on that portion of the loan is only deductible against the current purchase.
It would be better to get a fresh loan for the $182,000 rather than mix the two borrowings. But if it is too late consider that once you draw out the $182,000 you will have a mixed purpose loan, one portion for a pre budget property and the other portion for a post budget property. All deposits or offsets on a mixed purpose loan must be apportioned on a pro rata basis. You can’t say I just want to pay off the portion for the new property. TR 2000/2 https://www.ato.gov.au/law/
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
