Reimbursing yourself – Impossible
It is impossible to reimburse yourself with borrowed money after an asset has been paid for and claim the interest
Interest will only be deductible if borrowed funds are used to produce income.
Where people get into trouble with this sort of thing is when they don’t plan ahead, but may pay a 10% deposit using cash before they have the loans sorted out. Once a deposit is paid in cash it is paid. If you later borrow an equivalent amount from a loan increase and ‘pay yourself back’ the interest on this loan cannot be deductible because the interest does not relate to a loan used for the property.
So, before you pay any money for a property make sure you get the loans set up so that you can borrow to pay for that property.
On a $500,000 purchase a 10% deposit is $50,000.
A $50,000 cash payment, while you have non-deductible debt on the main residence, will result in about $2,500 per year in lost deductions ($50k x 5%). That is per year for the life of the loan. That could cost the average person $1000 per year out of their pocket – enough for a trip overseas each year.
Written by Terry Waugh, CTA & lawyer at Structuring Lawyers, www.structuringlawyers.com.au