Your Investment Property reader Terry contacted us with a common enquiry: I own several properties, so what do I do next? We recognised the opportunity to educate not just Terri, but also other readers, with a "game plan" to help him move forward with purpose.
Our expert, Philippe Brach, CEO of Multifocus Properties and Finance, weighs in to offer some strategic advice to Terry, who currently owns four properties.
First, Terry wanted to know: how can he use his equity to pay off his home loan quicker?
“The short answer is this: it is pointless to use equity in your investment property to repay your home loan. I hear many investors come up with this idea, erroneously believing that if you borrow against your investment property, the loan will be tax deductible,” Brach says.
“Here is the rule in one sentence. The tax deductibility nature of a loan is determined by what you use the loan for, not what asset secures it.
“As such, you can borrow against your PPOR to invest in property (for the deposit for example), and the amount you borrow to spend on your investment property is fully tax deductible. Also, you can borrow against your investment property to invest in another investment property and this would be deductible.
“However, if you borrow against your investment property to repay your PPOR home loan, the purpose of the loan is to help with a non-deductible investment (ie your home) and therefore you cannot claim a tax deduction on the interest. In other words, it makes no sense to extract equity via any loan to repay a PPOR loan.”
As an aside, Brach says he would strongly recommend that investors who extract equity from their home to invest in property set up a separate facility, rather than just top up their PPOR home loan.
“As previously stated the home loan is not tax deductible, so if you mix both deductible and non-deductible items in the same account, it becomes very messy to apportion how much interest is deductible and how much is not,” he says
:It can result in the ATO disallowing the whole interest amount if you cannot prove convincingly how you calculated the apportionment. It is best to just keep your non-deductible loans separate from your deductible ones. It is also good financial management to keep your business affairs (ie your investment properties) separate from your private affairs (e.g. living expenses, home loan, etc).”
This is just the beginning of the advice that Philippe Brach has for Terri. To read his full game plan, which includes a clear strategy to move forward with his portfolio and grow lasting wealth, pick up the September 2019 edition of Your Investment Property.
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