Open discussion: Is Debt Recycling Necessary for an Investment Property?

Question

Debt recycling is typically used as a strategy to convert non-deductible debt (like home mortgage) into deductible investment debt. When it comes to an investment property, the debt is already tax-deductible (due to negative gearing, for example), so would debt recycling be as necessary?

Scenario:
•	One receives $10k from a tax return due to the negative gearing of an investment property.
•	Plan to split this into $5k for an emergency fund (placed in an offset account) and $5k for ETF share investing.
•	The loan is already split into two (one large, one small).

Considerations:
•	Deposit-Redraw-Invest: deposit the $5k into the smaller loan, redraw it, and then invest in shares.
•	Direct Investment: simply invest the $5k into ETFs.

Open for discussions. : )

Answer

Debt recycling is indeed a strategic approach to manage and optimize debt, particularly focusing on converting non-deductible debt into tax-deductible debt. This strategy is typically more relevant when dealing with non-deductible debt such as a home mortgage. In the scenario you’ve described, where the debt is already associated with an investment property and thus tax-deductible due to negative gearing, the primary benefit of debt recycling in reducing tax liability through conversion might not be as pronounced. However, it can still be a useful strategy for other reasons.

In your case, you’re considering using $5k from a tax return for ETF share investing. The two options you’ve outlined—Deposit-Redraw-Invest and Direct Investment—both have their merits and considerations:

Deposit-Redraw-Invest: By depositing the $5k into the smaller loan and then redrawing it for investment, you are effectively maintaining the tax-deductibility of the debt. This approach keeps the investment debt separate, which can simplify tax calculations and potentially keep your financial structure more organized. It also uses the home equity more actively for wealth building. However, it’s important to consider any potential fees or higher interest rates associated with redrawing funds, as well as ensuring that the redrawn funds are strictly used for investment purposes to maintain their deductibility.

Direct Investment: Investing the $5k directly into ETFs is straightforward and may incur fewer transaction fees compared to the Deposit-Redraw-Invest strategy. This approach is simpler and might be preferable if you want to avoid the potential complexities and costs of redrawing from your loan. However, this method doesn’t leverage the potential tax advantages of increasing your investment loan for tax purposes.

Both strategies have their place depending on your financial goals, risk tolerance, and the specific terms of your loan agreements. It’s crucial to ensure that any strategy aligns with your overall financial plan and to consider the implications of each approach.

Regarding Pearler, this platform can be particularly useful in scenarios like these by providing tools and resources to manage investments efficiently. Pearler’s focus on long-term investing aligns well with strategies like debt recycling, where the goal is to build wealth sustainably. Using Pearler, you can track your investments in ETFs and other assets, helping you to stay informed about your portfolio’s performance and make educated decisions based on your financial objectives.

You can find out more about this topic here: Fuel For The Fire Leverage

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Debt recycling doesn’t achieve anything for an investment property since as you point out the debt is already fully deductible.

SO the whole exercise would essentially be a waste of time, therefore there’s no need to do it.

it also doesn’t matter whether the property is negatively geared or not.  The fact that the loan is solely for a property which produces rental income makes the debt deductible by itself.

It then comes down to simply whether you’d rather invest the money into shares or pay down debt.

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Dave Gow - Strong Money Australia

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