When you enter the investment market one of matters to which you should givfe careful, consideration is your investment loan. Most financial planners and accountants will generally recommend that you gear your investment to gain tax benefits. Gearing your property acquisition with an investment loan will generally provide you with a negative gearing benefit. Negative gearing applies when that the rental, business or dividend income you receive from your investment property, business or share portfolio is less than the costs associated with your investment as well as the interest on your investment loan. The “negative” shortfall between your investment income and the costs plus interest on your investment loan is an allowable deduction against your normal salary or self-employed income.
By claiming the shortfall that results, primarily being the interest on the investment loan, as a deduction against your normal gross income you reduce your annual income and as a result the tax you pay.
When considering an investment loan there are a few important matters you should check out:
1. Make sure you have an interest only component in your loan from the outset particularly if you already have existing home loan or personal / credit card debts. The reasons for this are two-fold:
(ii) Rather than making a principal and interest payment on your investment loan you should keep your payments on the investment loan to a minimum and use any surplus cash to reduce any personal or home loan debt. This is because the interest you pay on personal debt is not deductible. You are paying interest on anything other than an investment loan in after tax dollars. This makes personal borrowings very expensive – often termed “bad” debt because of the non- deductibility factor.
(ii) By just paying interest only on your investment loan you are not reducing the loan balance nor the deductible interest that you can claim on the investment loan.
2. If you have a home loan or personal debt at the time you are taking out an investment loan then you should look to include an investment line of credit within your investment loan package. This will provide you with access to funds to meet any shortfall in the interest repayments on the investment loan as well as any unexpected or standard costs in relation to your investment e.g. you may have a vacancy factor that was not factored into your cash flow – you draw on the investment line of credit to meet the regular monthly shortfall or any unexpected shortfall as noted above. By utilising the line of credit to meet the any costs or interest shortfall on the investment loan you are avoiding subsidising these costs with your personal income. Instead of using your personal income to meet the shortfasll costs you can instead apply what you would normally have paid to making an additional repayment to your non-deductible home or personal loan. This is a much more tax efficient way of using your personal income as opposed to using it to subsidise your investment loan and other costs associated with say, an investment property.
Carefully consider your
investment loan to build wealth and maximise your financial position. More detail on
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