Debt Recycling – Investment Property Outgoings

sydney1506 on 22/02/2025 - 18:40
Last edited 22/02/2025 - 19:22

Scenario:
Investment Property (IP) produces $55,000 in annual rental income with $12,000 in deductible expenses, $67,000 in interest repayments,, and $8,000 in capital repayments annually. Total outgoings are $87K with annual cash flow shortfall $32K.

  • Can another loan service the operating cash flow shortfall with the interest and borrowing expenses deductible?
  • Are there restrictions to the deductibility?

With reference to TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities, can the redraw facility on a Principal Place of Residence mortgage (e.g. $1M PPR mortgage) be used to finance the outgoings or shortfall, applying the debt recycling to IP ongoing outgoings?
- IP rental income is paid into PPR mortgage ($55K)
- Additional salary funds paid into PPR to cover IP cash shortfall ($32K)
- Redraw total amount required to fund IP outgoings ($87K)
- The redrawn funds are used to fund the outgoings on an income producing asset, being the Investment Property.
* * Would this convert $87K of PPR non-deductible debt into tax deductible debt, or is it limited/ restricted in any way?
* * Is Investment Property income ringfenced in it’s application to that IP’s outgoings?

UPDATE: Not being a cheapskate, will be talking to accountant next week. Just like to find out from others too. Nothing wrong with asking for people's experience for a wider perspective.

Financial

Comments

  • soan papdi on 22/02/2025 - 18:45
    +9

    What did your accountant say when you asked them?

    • boomramada on 22/02/2025 - 18:49
      +5

      Check with Ozb first, then may be a mortgage broker or bank?

    • sydney1506 on 22/02/2025 - 19:29
      -1

      Will be chatting next week, but was just wanting to get a general idea in advance!

    • Dollar General on 23/02/2025 - 06:00
      -1

      Accountant said to negative gear a property to save a few dollars on tax

    • HeWhoKnows on 23/02/2025 - 08:28
      -2

      Or the Tax Office

  • DingoBilly on 22/02/2025 - 18:58
    +7

    You're spending close to $100,000 on an IP yearly but don't want to get proper advice on it and would rather ask people on the internet who get excited about a $5 cashback offer?

    Just stop being a cheapskate and get proper advice.

    • sydney1506 on 22/02/2025 - 19:29
      -3

      Will be chatting next week, but was just wanting to get a general idea in advance!

      • bazingaa on 23/02/2025 - 04:56
        +1

        ask in r/AusFinance

    • HeWhoKnows on 23/02/2025 - 08:30
      -3

      1. OP doesnt even understand outgoings
        Outgoings are usually tax-deductable expenses which in OPs case add up to $79,000 plus the cost of any repairs.
        But yes, $87K from the lenders pouint of view

      2. In regards to getting another loan, ask your loan broker or the banks…..
        lenders dont look at your loan in isolation
        They also take into account your other income, loans and expenses…
        We are not qualified to make that decision for you!

      • sydney1506 on 23/02/2025 - 11:42

        OP is a chartered accountant so understands, but again, looking for suggestions. Not every tax accountant knows everything so its actually more responsible to get ideas and then discuss rather than just taking advice from 1 person.
        Absolutely you're not qualified to make the decision on the loan, and that wasn't the question. Question was around structuring the finances. When it comes to applying for loans etc obviously will be talking to the bank and brokers.

        Each of us earns circa $500k per year so affordablility is of no concern!

  • MS Paint on 22/02/2025 - 19:09
    +1

    $67,000 in interest

    Doesn't sound interesting to me. That must be close to $1m

    • sydney1506 on 22/02/2025 - 19:22

      Correct. Good maths!

  • Drakesy on 22/02/2025 - 19:15
    +6

    I love burning $30k a year in the hope my property appreciates faster.

    Thank god taxpayers will pick up the bill

    • sydney1506 on 22/02/2025 - 19:24
      -2

      Or perhaps it was my home but due to work needed to move…

      • Drakesy on 23/02/2025 - 02:44

        If you didnt get the tax benefits you'd probably have sold a lost making investment…

        *would definitely have sold a lost making investment

        • sydney1506 on 23/02/2025 - 11:39

          No, property is worth far more now. Just don't want to sell as planning on moving back in a few years at the end of the work contract.

  • AustriaBargain on 22/02/2025 - 20:02

    Can you even qualify for any loan if it's not making a profit?

    • Wiadro on 22/02/2025 - 20:19
      -1

      yeah easy, just use the equity in the ip to use it as a deposit for a 2nd IP.

      • AustriaBargain on 22/02/2025 - 21:08
        +1

        And they'd let him do that? He can't afford to pay this one off and a bank will buy some of this home off him to lend him more money to go even further into debt? And he's counting on house prices going up enough over the next decade or two to make up for all that interest? No wonder house prices are so high…

        • Drakesy on 23/02/2025 - 02:46

          @AustriaBargain has a point

          This is the exact reason why america ended in the GFC

        • sydney1506 on 23/02/2025 - 08:37

          hahaha, I can afford it and can easily qualify for another loan. But thats not the question.

  • Muppet Detector on 22/02/2025 - 20:20
    +3

    If you're operating at a loss, it'd be a very brave lending institution that will give you even more money to put towards the repayments you're already failing to meet.

    Generally speaking, money lenders want to see evidence that you can afford to repay the money you want them to lend you.

    • AustriaBargain on 22/02/2025 - 21:10

      Yes you would think that banks would rather lend to someone who is positively gearing their investments. But who knows, this whole property investment thing sounds like an evil house of cards that is so big and complicated that ordinary people aren't meant to understand how it works on paper.

    • sydney1506 on 23/02/2025 - 08:38

      Who said anything about failing to meet repayments. I simply asked about a different way of structuring the finances.

    • sydney1506 on 23/02/2025 - 11:45

      Repayments are not a concern at all. We both earn well enough to meet these repayments and then some with our salaries!

  • mskeggs on 22/02/2025 - 22:33
    +2

    I'm not an accountant, but I believe investment income, gains and losses may be counted against other investments income, gains and losses.
    Your capital repayments are not deductible expenses, however, you only have $79k of expenses (and I would look carefully at them to ensure they are deductible).

    I'd be seeking qualified advice and keep careful records in case of audit, as these are substantial claims.

  • Worf on 23/02/2025 - 07:31

    Are you paying principal and interest, or interest only on your IP loan? Also, how many years into your IP home loan are you?

  • Inertia-g on 23/02/2025 - 07:53

    It is possible to capitalise interest, but you would have to look in to whether it is really worth it - generally it would be done for cash flow reasons like going on maternity leave or taking a year off work, or to bring forward tax deductions, like paying interest a year ahead as you have had a big income year or some such.

  • BronzingStubble on 23/02/2025 - 10:54

    Why are you paying off capital? What's the point? Interest only pls.

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