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Re: Withdraw from investment property home loan to invest in shares

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Newbie

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Hi,

 

I'm looking to withdraw money from my investment property home loan to invest in shares. I understand the whole interest is still deductible because it's still investment activities.

 

For example, I have $300,000 investment property home loan. If I withdraw $10,000 from redraw facility today to invest in shares, my loan balance increases to $310,000 and interest on $310k loan is deductible.

After 2 year, I sell my shares for $12,000 to get cash. Is interest still deductible on $310k loan?

What if I return $10,000 to investment home loan that I originally withdraw and take $2,000 cash. Is interest deductible on the remaining $300k. The loan balance will be slightly less after 2 years.

 

Thank you.

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Devotee Registered Tax Practitioner

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Agree with macfanboy.

 

The tax deduction will depend on the shares producing income  =  dividends.

Selling at profit later is not income unless you are a share trader  -  evidence presented indictes that you are not.

 

After 2 year, I sell my shares for $12,000 to get cash. Is interest still deductible on $310k loan?

That depends.  If you use the money to buy more dividend-paying shares, then yes.

If you use the money for private purposes, then no  -  because the purpose of the borrowing has changed.

If the dividend-paying shares became worthless e.g. Onesteel then it would be impossible to repay loan from sale of shares, so interest continues to be deductible  -  there have been a few cases on this sort of claim.

 

What if I return $10,000 to investment home loan that I originally withdraw and take $2,000 cash. Is interest deductible on the remaining $300k. The loan balance will be slightly less after 2 years.

A macfanboy indicated, it is just a repayment.  The interest will be deductible, subject to comments above.

 

If the loan is contaminated by private borrowing, then you will need to apply the formula in ATO  TR  2002/2.

 

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Taxicorn

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@thanhdm90 

 

The interest on a loan is only tax deductible if the borrowed money was spent on an asset that is currently being used to produce income.

 

If you deposit money into the loan account, it doesn't matter where it came from, then, of course, the remaining balance's interest is deductible.

 

You also have to pay tax on that profit that you made selling the shares.

 

Best answer

Devotee Registered Tax Practitioner

Replies 2

Agree with macfanboy.

 

The tax deduction will depend on the shares producing income  =  dividends.

Selling at profit later is not income unless you are a share trader  -  evidence presented indictes that you are not.

 

After 2 year, I sell my shares for $12,000 to get cash. Is interest still deductible on $310k loan?

That depends.  If you use the money to buy more dividend-paying shares, then yes.

If you use the money for private purposes, then no  -  because the purpose of the borrowing has changed.

If the dividend-paying shares became worthless e.g. Onesteel then it would be impossible to repay loan from sale of shares, so interest continues to be deductible  -  there have been a few cases on this sort of claim.

 

What if I return $10,000 to investment home loan that I originally withdraw and take $2,000 cash. Is interest deductible on the remaining $300k. The loan balance will be slightly less after 2 years.

A macfanboy indicated, it is just a repayment.  The interest will be deductible, subject to comments above.

 

If the loan is contaminated by private borrowing, then you will need to apply the formula in ATO  TR  2002/2.

 

Newbie

Replies 1

Hi,

 

Thanks for answering my question.

 

My concern is when I return $10,000 to the loan, Does it consider as paying off the whole home loan or paying off the $10,000 debt I withdraw earlier?I just want to avoid the tax complications.

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Taxicorn

Replies 0

@thanhdm90 

 

It will be seen as paying off the debt which is split.

 

So if you owe $100,000 on the house and $50,000 on the shares then the interest deductible is :

 

House = $100,000/$150,000 = 66.67%

Shares = $50,000/$150,000 = 33.33%

 

So when you repay $10,000 it will assume 66.67% ($6,667) went towards the house an 33.33% ($3,333) went toward the shares.

 

This is because you have mixed the purpose of the loan so that is the most logical and fairest way to do it.

 

 

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