Structuring Finance for your Investment Property

There are over 1.5 mil individuals who own an investment property in Australia. Over 66% of those investors who own investment property use negative gearing. This means over 1 mil taxpayers have finance attached to their investment property.

These are ATO statistics for the year ended 2006. From these figures it is clear that investment property is a tangible investment, which can offer solid returns, rental income and potential tax concessions. For many, investment property is an achievable way to attain financial freedom.

For investment property to work for you it is important to consider how you are going to structure your finance. This is particularly important where you have a strategy to increase your investment property portfolio, as a problem at the beginning can cause finance complications and delays later.

Cross Collateralise - This is where your mortgage is secured by more than one property - for example: Investment property and residence is used as security for one loan.

Preferred by financial institutions, cross collateralisation is not beneficial for the property investor for three reasons:

1. if a problem arises in one property, both properties may be jeopardised
2. to access equity in one property will attract extra costs and complications
3. split loans between private and investment can cause taxation complications.

Recommended structure - Where equity is available in your private residence it may be more effective to use that equity to pay 20% deposit and acquisition costs on the investment property. The balance of the purchase (80%) is then secured independently by the investment property. There are three benefits to this structure:

1. If a problem arises in one property it won't necessarily cause a problem for the other
2. accessing equity in either property is far less complicated
3. there is a clear distinction between private debt and investment debt with less tax complications.

By David Mayanrd
My Tax Zone

Copyright 2014. My Tax Zone.