Financial Error Regarding Line of Credit

If you have lines of credit and if, additionally, you have a property investment portfolio, there is a common and a frequently occurring error you should not forget about in a hurry. Certainly when the error can cost a great deal to rectify!

Line of credit

Before talking about the error, let me talk about what a line of credit is. It is a sum that the bank –kind of- forwards to you and you are free to spend it anywhere you like. For instance, if bank has given you $200,000 as the line of credit, you can use the amount to make upfront payments for your next property. This being a business expense counts as a tax-deductible one. The interest you need to pay on the upfront loan happens to be the tax deduction in this case.

Error related to it

Now, the error investors make is putting their wages or remuneration into the very line of credit. They feel they can save a lot of interest this way. To make matters worse, people are wrongly advised to fetch a credit card and get all the expenses transferred to it.

The general perception is that “I have my wages in my line of credit, earning me a decent interest” and “I have 55 days of interest absolutely free if I can remember to transfer the amount in my line of credit to meet credit card obligations”.

You have changed the nature of the loan, haven’t you?

Is it hard to figure out the basic nature of your error? What was the original purpose of your loan? Well, it was tax deduction and now it is not. The tax guys scrutinise how the money is moving and what the purpose of the loan was. My recommendation to you is to get yourself two lines of credit. This way, you can deal with private mortgage a lot better.

Have you ever been caught on the wrong foot by the ATO?