In today’s show we get answers to a number of your questions from Chan & Naylor’s Ken Raiss to do with lines of credit, GST and Capital Gains tax on vacant land and transferring equity from a principal place of residence into a trust.
Kevin: A very interesting question in the show that we’re going to answer now for Brad. Brad, thank you very much for your question. Brad’s question is:
“I have a finance-related question specifically about the intricacies of lines of credit. All of the articles I find say that you should get a line of credit, but none really drill down any deeper into the intricacies of using one.
“I understand that you would use your line of credit for investing costs such as a deposit on a new property or the levies or rates for a property. My uncertainty is whether I am then able to climb the interest charged on the line of credit.
“To make it more complicated” – thanks for doing that, Brad – “what if you were to pay your investment loans off using this line of credit? Surely then you couldn’t claim the interest on your line of credit as well as your investment mortgage because that would be double-dipping, right?”
Well, let’s get an answer for you, Brad, because joining is Ken Raiss, our expert in all of these matters from Chan & Naylor.
Good day, Ken.
Ken: Hi, Kevin, and hi, listeners.
Kevin: Just answering Brad’s question there, would you like to dive in and give us a bit more information, too, about lines of credit?
Ken: Okay. Lines of credit or an equity loan – different people call it different things – that’s when you go to your bank and actually ask to borrow against that equity that you have built up in your property. The equity is that difference between the market value and the debt.
A lot of our clients use that line of credit for two principal reasons. The first, as you were saying, Brad, is to have that amount of money available to pay deposits if they want to buy a property or to pay any of the ongoing expenses of owning that property if their cash flow isn’t enough. If you’re using it for investment purposes, such as the deposit or the costs, then the interest is deductible. The tax office looks at the purpose of the loan. If you borrowed the money for investment, then it’s deductible.
The other reason people use a line of credit is what I’ll term a buffer. A buffer, again, is a line of funds available to you in case something goes wrong with that property and you can’t fund the repayments. You could lose your job, interest rates go up, the tenant leaves, etc. Again, in all those instances, the interest would be tax-deductible because the purpose for investment.
The second part of your question is very interesting, which was, “Can I pay off the debt using the line of credit, and is that money tax deductible?” In simple terms, the answer is actually yes because what you’re doing is substituting your original bank loan – because you’re paying off debt. That would have been a loan from a bank. You’re now paying off that bank debt and substituting it with the debt from that line of credit.
It’s the same as if you would have refinanced and gone to a different bank. Because you’re using it for investment purposes, the interest on that would be tax-deductible.
Kevin: That’s certainly good news. I’m sure Brad’s going to be pleased to hear that, Ken. Well done. It’s a great question, and what we’re going to do, Ken, is give Brad a 12-month subscription to Australian Property Investor magazine for that question. It’s outstanding.
Ken: A very good question.
Kevin: Hey Brad, we’ll be in touch with you. We’ll get your mailing address and we’ll make sure that you get the next in the series of Australian Property Investor magazine. We give one or two of those away every week for our questions. I think we’ve given two away this week, but you can join in the fun, too, and who knows? We might choose you as one of those as well. Just send your questions in through the website or directly to me, Kevin@RealEstateTalk.com.au.
By the way, too, if you are already a subscriber to Australian Property Investor magazine, we’ll extend your existing subscription by a further 12 months at no charge. So there you go. Go to it.
Ken, I want to thank you because you’re always available for us. We really do appreciate it. You give us some great advice, and our advice to you is to always make sure that you deal with Chan & Naylor.
Ken, thanks for your time.
Ken: Thank you, Kevin, and thank you, listeners.