14 Feb Readers’ Questions: Refinancing & lifestyle – Andrew Mirams
Russell has asked us to further clarify a point made by Andrew Mirams in a recent show about refinancing. In today’s show, together with Andrew Mirams from Intuitive Finance, we’re going to answer Russell’s question.
Russell, we’re going to give you a 12-month subscription to Australian Property Investor magazine for that excellent question.
Kevin: We’re going to answer a question in the show now from Russell. Thanks for the question, too, Russell.
It is in relation to some comments that were made recently by Andrew Mirams from Intuitive Finance to do with refinancing investment, and in particular, Russel wants to know by refinancing, you could access your equity and use the funds for a deposit on a property investment to invest in stocks and shares at education costs to support your children in purchasing their own home. I guess the key question here is Russell wants to know what other things could this be used for as opposed to property? Could it be used for lifestyle?
Andrew, it’s a great question, isn’t it?
Andrew: Yes, it’s a fabulous question, Kevin. Thanks, Russell, for asking it. As experts, we tend to just roll these generalizations out and probably don’t drill into the specifics like Russell has asked. I think it’s a great question.
The key here really is the purpose, Kevin, the purpose of what you’re using the money for. It’s his equity. If Russell has done well in his property portfolio and it’s all increased in value and he wants to refinance it and use that equity, he can use it for whatever he wants. That’s the end of the game.
But the key is not what we would call blending personal use – so whether he’s funding some education costs or he’s going on a holiday or buying a new boat or a car as a reward for what his property portfolio has done – blending that with then a deposit on that next investment property because that makes it really difficult to determine your tax deductibility, and the ATO will often scrutinize that quite heavily.
Kevin: Therefore, obviously, the answer to the question is he can use it for whatever he likes, but he should use it in a separate sense. Is that right?
Andrew: Absolutely, and that is the key. Let’s just say, he has three properties, his home and two investment properties. His home, he might have only just purchased, and that hasn’t really gone up in value because he’s just upgraded, but the two investment properties have gone up in value – let’s just say for ease of numbers – $100,000. That means at 80%, he could access $80,000 for each.
Now, he might have gotten active in the property market when he was just married and didn’t have children, and now the kids are going to school, but he also wants to buy the next investment property. So in that case, he would do two separate lines of credit or interest-only loans, or whatever it be, but two separate facilities.
One, you might say, “Look. This is going to be for the personal use,” and the other for the investment use.” By doing this, you’re quarantining both debts. One is very clearly used for personal use that can’t be tax deductible or isn’t tax deductible, and the other that is used for the deposit on his next investment, which very clearly is then for the purchase of an income-producing asset and is tax deductible.
Kevin: What about in the event Russell decides to buy a holiday home that he’s going to use both as an investment but also wants to live in it, as well? Is that a different scenario again?
Andrew: That would need a little bit more analysis. I wouldn’t use those two $80,000 scenarios. The key with holiday homes is how long is it used for rental and how long is it used for personal use? If the primary goal of this is as a personal-use asset, and he’s going to use it for half the year and the other half, it’s available for rent, then he really has 50% of it is available for tax deductibility, and 50% isn’t because that’s personal use.
Now, you’re really delving into some accounting advice, but there are ways that the accountants will split that on your tax return and things like that. Again, if that was the primary goal of what you wanted to do, you would just need a little bit more analysis around both of those scenarios, I think.
Kevin: Yes, great question, Russell, and a great answer from Andrew Mirams, who we’ve actually interrupted on a break, and I want to thank you for joining us today, Andrew. Andrew Mirams, of course, is from Intuitive Finance and always a regular on our shows, and you’ll find all the information about Andrew on our website, as well.
Russell, we’re going to give you a 12-month subscription to Australian Property Investor magazine for that excellent question. We’ll be in touch with you to get all the details, and you’ll be getting the next edition with our compliments.
By the way, too, if you send a question in and we choose it and you are already a subscriber to API, which Russell may be, well then we’ll extend your existing subscription by a further 12 months with our compliments.
Once again, Andrew, thanks for your time. Mate, you enjoy your holiday.
Andrew: My pleasure, Kevin. Thank you. All the best, and great question, Russell.