Ok, so we thought that between now and the end of the year (and damn, that’s creeping up awfully fast now!) we might go through a handful of clever tax planning strategies that you can use to improve the bottom line. Not all of these will apply to everyone, but hopefully will at least get you thinking about what you can do over the next few weeks to make tax time that little bit more fun than it usually is.
So first up, prepaying interest. This is one that pops up from time to time on the various investment forums in which we like to contribute and so seemed like a good place to start this series.
The idea is to use either cash, or funds in a line of credit (ie, equity) to pay the interest on your investment loans up to twelve months in advance. The bank will essentially fix the interest rate for that period at an agreed level (and usually at a slight discount) and take the cash out of your bank account or line of credit to fund the expense up front.
The are a few main benefits here; you increase your available deductions substantially, as you’ve now got up to two years worth of interest to claim all at once. And, your cashflow for the next twelve months is also improved, as you receive the rental income without the usual interest expenses. And, the bank will often offer a discount for paying in advance. Nice!
An important drawback to consider though is that if you do it once, you’ll really want to consider doing it again next time. Otherwise, there won’t be any interest expenses paid in the following year which means less tax benefits for you then. So, it can be something of a trap like that, but should be easily managed if you keep on top of things and prepay every year until you sell or no longer need the tax benefits of negative gearing.
You’ll also need to move quickly; the banks can take a little time to get themselves organised for this sort of thing so don’t wait until the last week of June to start talking to your broker. Using your available funds to prepay expenses will also reduce your available funds for buying property, so be sure to weigh that up in your calculations as well. And of course, drop us a line if you’d like to talk more about how this idea can work for you.