How to pre-pay interest to minimise tax

THERE may be no tax cuts coming on 1 July, but it's still smart in most cases to bring tax-deductible expenses into this financial year if possible. 

It may be getting a bit late to paint your investment properties or do major repairs on them, but a deduction that is available to all investment borrowers is pre-paying interest. 

Let's assume you have an investment loan of $200,000 at 6% and that it is on an interest only basis as I have always recommended.  If you earn $100,000 a year now and prepay a years interest, that's $12,000, your tax saving will be $3850. 

A benefit of doing this right now is that you will have protected yourself from any interest rate rises in the next 12 months if they should occur.

Make sure you liaise with your lender because you can't simply plonk $12,000 into the loan account and then claim a tax deduction for it.  Doing it this way will result in the lender simply taking the repayment off the principal and you suffer a double whammy.  You will not be eligible for a tax deduction of $12,000 and you will have reduced your tax-deductible debt by $12,000 and, with it, your future tax deductions.

Be careful if you have a line of credit loan as they work like conventional bank overdrafts.  They do offer greater flexibility than ordinary fixed rate interest only loans but, unfortunately, this flexibility does not extend to prepaying interest.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.
 


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