How to Save Tax by Prepaying Interest on Your Investments
If you're looking for a smart way to reduce your taxable income and increase your cash flow? If you have borrowed money for investment purposes, such as buying a rental property or building an investment portfolio, you may be able to prepay your interest costs for the next year and claim them as a tax deduction in the current year. This strategy is called **interest in advance** and it can offer you several benefits.
Prepaying interest for rental properties
If you own a rental property and have an interest-only loan, you can prepay the interest for the next 12 months before the end of the financial year (EOFY) and deduct it from your income in the current year. This can lower your tax bill and boost your tax return. By prepaying interest, you can also lock in a fixed interest rate for the next year, which can protect you from possible rate rises and help you budget better. You may also get a discounted rate from your lender for paying interest in advance.
Prepaying interest for investment portfolios
If you have an investment portfolio of shares, bonds or managed funds, and you have borrowed money to invest, you can also prepay the interest on your loan before the EOFY and claim it as a tax deduction in the current year. This can reduce your taxable income and increase your cash flow. You can use the extra money to reinvest, pay off debt or spend as you wish. Prepaying interest can also help you secure a fixed interest rate for the next year, which can give you peace of mind and stability.
How to prepay interest
To prepay interest, you need to have an interest-only loan that allows you to pay interest in advance. You can contact your lender or broker to find out if your loan is eligible and what are the terms and conditions. You may need to pay a lump sum of interest upfront, which can be a large amount depending on your loan balance and interest rate. You should also check with you Gotax if this strategy is suitable for your situation and how much tax benefit you can get.
Beware the marginal tax rates
Utilising this strategy to save tax comes with a practical warning. Don't undertake this strategy if your prepayment lowers your income to the lowest levels of marginal tax. You are just wasting the benefits of effective future years of tax deductibility by reducing your income to low levels. Talk to Gotax so we can enure your prepayment maximises the tax bang for your bucks.
Prepaying interest is not for everyone, but it can be a useful way to save tax and manage your cash flow if you have borrowed money for investment purposes. If you are interested in this strategy, talk to your lender or broker today and see if you can prepay your interest before the EOFY.
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