We revisit John’s most popular blog posts from the last 12 months
Q: My partner and I both have investment properties that we’re refinancing that have equity from capital growth. We’re also looking to buy a new home together and will use the equity from our investments to put into the new home. Can we put the additional funds from the refinance into the offset or redraw accounts of our existing investment properties until we need it, or will this create tax issues when we take it back out?
A. Tax and investment properties can be a complicated best, so it’s great that you’re doing your research before jumping in and making changes that could have a negative impact.
While doing your own research is commendable, nothing beats getting professional advice so I strongly recommend you speak to a financial adviser or tax accountant who specialises in property before making any decisions.
I can’t give you advice, but generally speaking offset and redraw accounts can have different tax implications, and this is further impacted by what you use the money for.
Mixing private and investment borrowings, which is what you’re talking about here by putting money for a private property purchase in the offset or redraw account of an investment property, is where you can run into complications with tax.
Here’s a quick overview of offset and redraw accounts and the tax differences.
- Additional payments into your home loan’s redraw account reduces the principle loan balance and the interest charged
- The money can generally be redrawn, but different lenders will have different restrictions like minimum redraw amounts, time to redraw, limited vs unlimited redraws, withdrawal fees, etc
- If you redraw money from an investment loan for non-investment purposes the interest on that amount will no longer be tax deductible which will ultimately cost you more for your investment property.
- Additional payments into your home loan’s offset account reduces the interest bearing balance, so your interest is calculated on the net balance of your home loan and offset account
- Sometimes more flexible than redraw and may be treated as an everyday transaction account
- Money withdrawn from an investment loan offset account for non-investment purposes shouldn’t affect your tax deductibility on the overall interest expense, but might impact whether your property is positively or negatively geared which will impact your tax.
There’s a great case study on SMH.com.au about this which is worth a read. Overall, it’s generally much cleaner and safer from a tax perspective to keep your investment loans clean and not pollute them with money for personal use.
I’d definitely recommend you seek expert advice. If you need a recommendation, try your local mortgage broker or real estate agent who should know experienced professionals in your area.
Do you have a question for John? Leave it in the comments below and check back each Sunday to see if your question has been answered!
If you found this article useful please share it using the buttons below.