In the Interests of Tax Effectiveness

The Daily Mercury (Mackay, Australia), July 27, 2012 | Go to article overview

In the Interests of Tax Effectiveness


Byline: NPA Property Group npapropertygroup.com.au

BUILDING a property portfolio can seem complex at times. There are many decisions to be made.

Such decisions as what type of property do I buy and in which area need to be made. There are strategy decisions to be made and there are issues such as aWhose name do I put on the contracta and how do I structure my tax.

There are also many decisions to be made on the finance front inclusive of which bank do I use and what type of loan best suits my situation.

One such question, when it comes to finance is quite simply choosing between principal and interest and interest only.

Conventional wisdom dictates that at first glance principal and interest would be the logical option. As the ability to pay down debt and create more ownership (equity) within the property can be a comforting thought although this comes with a higher mortgage payment, which can increase holding costs and potentially impact on an investor's budget.

Conventional wisdom also dictates that interest only at first glance may not seem too logical an option. The thought process with some investors may be aWhy would I just pay the interest and not make any inroads into the debt and not create equity as a resulta to some this seems irrational.

Let's explore why reversing our conventional wisdom beliefs may prove beneficial when investing in property.

In order to create logic from a decision to have an interest only loan, let's look at it from three perspectives and assuming a $2000 mortgage payment consists of $1600 in interest and $400 in principal.

Firstly, logic can be drawn from the perspective of maximising tax efficiencies. For example, if an investor bought an investment property and still had debt on the family home (referred to as NTE or non tax effective debt) then an interest only payment on the investment property (referred to as TE or tax effective debt) would preserve the tax effective debt at the highest rate and not help dilute future tax advantages. …

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