Following on from the tip on debt recycling, one other variation is to borrow to pay both upfront and ongoing expenses. This can allow the recycling to happen even faster than normal.
Here we will talk about expenses other than interest (a topic for another day).
Upfront costs of a property that could be borrowed include:
- Stamp duty
- Government charges
- Conveyancing Solicitor fees
- Structuring Advice
- Buyers agent fees
If you own an investment property there will be thousands of dollars in expenses to pay each year. These expenses may include:
- biocycle sewerage maintenance
Say these cost amount to $3,000 per year. If you pay these out of your pocket that is $3,000 that comes out of your non-deductible home loan or offset account attached to non-deductible loan (assuming it is not paid off). That means more non-deductible interest must be paid.
Instead of using cash to pay these expenses it may be possible to borrow to pay these expenses. If you borrowed $3,000 at 5% that is $150 in interest each year you must pay. But it is not $150 in additional interest as the $3,000 you would have used can go off the non-deductible home loan. This means the overall interest bill is the same.
The real benefit will be in the tax savings. If you are on the top tax rate the tax savings will be about $70 per year in the first year. That is $70 extra you can pay off your non-deductible home loan in year 1.
Not much you may think, but imagine you had 10 properties. Imagine the compounding effect over 2 or 3 years – or 30 years. Expenses also generally increase with inflation and as things wear out the repair costs become larger.
Some people take action to stop the property manager paying these expenses out of the rent. The more you pay yourself the more you can borrow to pay.
Also these expenses could be paid with a credit card which gives you points. More points means more rewards (just make sure the benefits outweigh the fees).
However there is a trap with credit cards – see a future tax tip on this (see Tax Tip 12). If using a credit card you must be careful not to mix expenses on it.
And some rental property managers will also allow their fees to be paid by the landlord instead of taking the fees from the rent.
Keep in mind that there can be other issues where the loan used to pay for the expenses is in a name other than the person who owns the property on which the expenses are paid – such as a spouse. See Tax Tip 79 for the situation where there are 2 spouses on the loan but the expenses relate to a property owned by one of them only. Where X is on the loan but the expenses relate to Y then a loan agreement would be needed.
Warning – This has all the marks of a ‘scheme’ with a dominant purpose of increasing tax deductions. Don’t implement this without professional tax advice. Members of the ATO have indicated they are looking into this strategy.
Written by Terry Waugh, CTA & lawyer at Structuring Lawyers, www.structuringlawyers.com.au