Hi guys I thought this would be relatively simple and common but can't seem to find an answer online.
I have an O/O property (No offset) and an Investment Property (with offset)
Currently all my savings are kept in cash.
Can I park all my savings in my Investment Property Offset account or will that contaminate my interest Deductibility?
I will speak to an accountant, but for now I thought this might be pretty simple?
Thanks
If OP can't set up offset on owner occupier loan, the next best option would be an offset on the investment loan. This would be better than having savings, where the interest would be lower than the loan rate and taxable.
Parking money in an Investment Property Offset Account
How much do you spend on parking every year to go to this extreme?
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you can put it in your offset account, to reduce the interest charged. you obviously can only claim the reduced interest on your tax.
better off getting o/o offset acc and offsetting it, however if you cant go with above
As interest charged on an investment property is tax deductible while interest charged on a owner occupied property is not. It makes more sense to park money in your OO property in a linked offset account.
better offset your PPR property
I have limited knowledge so happy to be corrected, but afaik once you put money into your investment property's offset, you don't want to then take it out to use on personal stuff - that's where you'd contaminate and lose out on (legal) tax deductions.
So IMO you'd put as much money into the investment offset as you're comfortable 'locking away' for use only on investment-related expenses. But as others have already mentioned, you ideally want to have an offset on your PPOR and fill that up first.
disclaimer: I'm not a professional so this may not be ideal for your specific setup.
you only contaminate it when you make extra repayments into your investment loan account itself. the offset account is technically a separate account (with most lenders)
Are you 100% sure about this? The offset linked to the investment property is directly affecting your investment costs.
But your loan account is the one incurring the interest, which is remaining at the original amount.
The interest you pay just "happens" to be calculated based off the offset account as well.
I think the best option is an offset account with OO property but failing that offset in IP is still better than bank account.
This is incorrect.
Monies put into an offset account are seen by the tax office differently to putting monies into the loan account.
Monies put into an offset account are doing merely that … offsetting interest, but are not seen as paying down the loan.
Monies put into the loan account are seen as paying down the loan … and therefore any redraw from it will be seen as a "new loan with a different purpose" and therefore will cause the contamination issues.
In direct answer to the OP's question, monies in an offset account do not disturb the deductibility status of the attaching loan account. You can take monies in and out of offset accounts freely without "contamination".
Righto thanks for the correction.
Hi, I am a total newbie to this. I have a mortgage but my mortgage doesn't have an offset account. What would be the difference between an offset account vs making additional repayments on the loan? I think my mortgage has a redraw option if you need to take the funds out to buy another property as collateral, for example.
I also noted that offset account mortgages are usually either has a higher loan interest rate or additional yearly fees. I guess additional payment usually have a minimum, so you save a bit of interest getting the interest deductions while working towards the minimum repayment. Is it worth the extra yearly fees though?
The reason I am asking is that I am thinking of refinancing so I am looking at options at the moment.
There wouldn't be any difference between offset vs redraw ability for your PPR mortgage. There's a difference if it were an investment loan though, as if you put money into the investment mortgage and then 'redraw' funds, you can only deduct the interest against the reduced mortgage. Even if the mortgage debt increases after your redraw, payments into that account are taken as payment of the balance.
Thanks for that. I think I understand what you mean.
The easiest way to explain is offset = your monry that you can take any time without limits, extra repayment is money you owe the bank that you have given them in advance, and so redraw is that when you take it out you have to ask them for permission (hence lots of redraws have limits on how much and how often)
You sure can but generally the stockmarket is the lesser of 2 evils.
Identifying property growth is of course still lucrative.
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Paying back mortgages that are 2% APR while other markets are growing at >7% is burning money.
Never pay back debts that can be used to buy assets that grow in value and/or produce passive income. Maintenance fees, interest, and sometimes local/state taxes are all claimable deductions and should be taken advantage of to avoid income taxes.
As noted above, putting spare cash in an offset account attaching to an investment loan is "no problem" in the context of contamination. You can move money in and out of the offset freely (but not the actual loan account) without causing accounting problems on the interest deductibility.
From a return perspective though, you'll get a better outcome by putting this against your OO loan. I note that it does not have an offset account, but I would look seriously at getting that feature added. You should also look to see what redraw facilities are available to you on that loan. Pending costs and restrictions, that might be your best outcome.
Or add a redraw facility on the O/O loan
For your investment property, you can only deduct (limiting response to interest repayment component) what you're actually incurring. So more money in the offset will result in less interest being incurred, therefore less deduction.
If you still have mortgage on your principle loan, then arrange to have an offset account made against that and then park the cash there. You want to be paying less interest on that loan as it's not deductable