Avoid The Most Common Financial Mistake Made With a Line of Credit

There is a critical mistake made by many people who have lines of credit and who have investment properties.

This mistake is common and you’ve got to be aware of it, because it’s costly to fix up.

Now, I assume you know what a line of credit isA line of credit is like a big credit card

A line of credit is like a big credit card.

The banks give you approval for a limit on how much you can spend, and you can spend it anywhere you want.

You can even use it to pay the interest on the line of credit itself.

Let’s imagine someone gets a line of credit of $100,000, and they’ve used that $100,000 as the 20% deposit to purchase a property.

So it’s a now business expense.

It’s tax-deductible.

The interest on that loan is a tax deduction, because the money went towards the investment property.

Here’s where they make a mistake…

They put their wages into that line of credit, because their bank or their broker says, “It’s a great idea, because it will save you interest.”

Isn’t that what most people are told?

Many people are also told to get a “credit card” and put all of their expenses on it, then pay it off once a month.Interest rate

So you’ve got your wages sitting in your line of credit, earning you interest and then you put all your expenses on your credit card.

This gives you 55 days interest free, and on the 54th day or 55th day, you transfer the money from your line of credit and pay down your credit card.

The problem with that is you just changed the purpose of your loan.

The original purpose of the loan was a tax deduction.

Okay. Let’s say over 12 months you put your wages into your line of credit.  And let’s say your wages came to $50,000.

Let’s look at the big picture here…

You’ve reduced your line of credit down to $50,000, and let’s assume over 12 months your credit card payments totalled $50,000.

Once you pay this off, your line of credit is now back up to $100,000. 

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But you saved the interest on that $50,000 whilst your money is sitting in the line of credit which is now back up to $100,000.

Now, can you see that this money here is private?

Can you see that you’ve just changed the purpose of your loan?

The tax department looks at where your money went to and the purpose of that loan.

Even though your $100,000 liability is still there and you’re claiming 100% of the interest; here you can only claim 50% of it.

And to make things worse, your accountant will probably spend $2,000 in trying to work out all the little bits and pieces going back and forth in the last 12 months.

Does that make sense?

You need to be very careful with this.

So what should you do?

Have two lines of credit.

For example, if you have a business or an investment line of credit, and that’s $100,000, you don’t touch that. You leave it alone.

You might also have a private line of credit for your private mortgage, and it might also for $100,000.

This is where you put your wages into and you pay your credit cards from.



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Ed is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Visit

'Avoid The Most Common Financial Mistake Made With a Line of Credit' have 18 comments

  1. Avatar for Property Update

    December 6, 2013 @ 11:43 pm Jate

    Hi Ed, if you are using the LOC for investment purposes then wouldn’t you be trying to maximise your tax deductions? Would you put rental income into your LOC account?

    and can you use your LOC to pay for your loan interest repayments?
    That is using a loan to pay for another loan?


  2. Avatar for Property Update

    December 4, 2014 @ 5:47 am Don

    A line of credit here is clearly a silly idea. An alternative is to have an offset account and put all your funds in there. The tax office has no problems with that structure, and has the same effect.


    • Avatar for Property Update

      December 4, 2014 @ 9:24 am Michael Yardney


      You’re right that people can also use offset accounts to achieve the same result.
      I think Ed’s point is that some people don’t and make mistakes


    • Avatar for Property Update

      December 12, 2014 @ 2:14 pm Ed Chan

      Hi Jate
      Yes that is right but you need to be careful that you don’t change the “purpose of the loan” from an “investment”(tax deductible) to “private” (Not tax deductible). This can occur inadvertently when you redraw to pay off your credit card (which is private).
      You can use your LOC to pay your loan interest


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        January 11, 2016 @ 12:47 pm Fred

        Hi Ed,

        Can you also use the investment LOC to cover other investment property costs (eg. strata fees, rates, insurance etc etc).


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          January 12, 2016 @ 10:30 pm Ed Chan

          Hi Fred
          Thank you for your question. The answer is yes one can use your investment LOC for other investment expenses.


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      December 12, 2014 @ 2:22 pm Ed Chan

      Hi Don
      Yes what you have suggested also works. However I don’t think having an LOC is the problem. Its just how the LOC is used . If one has another loan that is private (interest is Not tax deductible) its best that excess funds are kept against this loan thus saving them non deductible interest as an offset account generally pay you less than it cost you in the LOC. The bank always makes a margin. If they don’t have a non deductible loan than rather than putting it against the deductible LOC than its better to use an offset account as you have suggested.


  3. Avatar for Property Update

    December 12, 2014 @ 10:35 am Harry

    Hi Ed
    Our company owes a loan to two of its shareholders I want to take a line of credit to pay it back .
    The line of credit is in the name of another shareholder of the company and is for business purposes the money from this line of credit will go back to the shareholders to use for a personal home and the company will pay off the interest and transfer any company profits into an offset account
    Is this the best way to structure this ?


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      December 12, 2014 @ 2:30 pm Ed Chan

      Hi Harry
      Yes that will work. However as the LOC is in the name of the shareholder you will need to prepare an “On Loan Agreement” from the Shareholder to the Company. I assume the original loan owed by the company to the shareholders was used for business purposes and if yes than the interest is tax deductible to the company. There is no need for the Company to use an offset account as it can simply pay off the loan from company profits.


  4. Avatar for Property Update

    January 11, 2016 @ 7:56 am Shana

    Hi Ed, couple of questions
    1. Can you top up your LOC once funds have been used up for all investment property purposes. (My accountant advised this is OK) Can the top up be transferred from your Offset Account or does it need to be a rent deposit top up to ensure LOC is being used correctly to maximise tax deductions?
    2. My current LOC interest payments are coming out of my offset rather than the LOC itself. It was originally set up to come out of LOC itself but my accountant had me change this.
    So much conflicting advise which is extremely frustrating!
    Appreciate your feedback


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      January 12, 2016 @ 10:39 pm Ed Chan

      Hi Shana
      Thanks for your questions.
      Question 1:
      Yes that’s ok. The problem is not depositing money into your LOC. The problem is when you spend your LOC. if you spend it on something of a private nature the interest is no longer tax deductible as the determinant of whether the interest is tax deductible or not is based on what the money was spent on.
      Question 2: yes this is ok as long as LOC has been incurred on investment expenses.


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        January 14, 2016 @ 8:06 pm Shana

        Hi Ed,
        Thank you for your reply. Re point 2, does this mean that I have missed being able to claim tax deductions on LOC interest as interest is being deducted from OffSet rather than LOC itself? All LOC activity is on investment expenses.


  5. Avatar for Property Update

    January 19, 2016 @ 12:34 pm Jim

    Hi Ed, thanks for the great article. I seem to recall there was some issue in recent years where the ATO took a dim view of using money from a LOC to pay the interest on your investment loan, then claiming both the investment loan interest and the LOC interest as tax deductions. The ATO wanted investors in this situation to put every $ they had into the LOC so that they were not claiming interest on interest. Has that issue been resolved?


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      November 9, 2016 @ 11:05 pm Ed Chan

      Hi Jim
      Thanks for your question. The ATO had a problem with a blatant abuse of the system where some people were putting rental income into their private home loan to reduce it quickly but increased their investment loan (or LOC) which was tax deductible by using it to pay interest on interest with no rental income being deposited into it.
      So there was no problem using a LOC to pay interest as long as it was in the spirit of funding a legitimate shortfall.


  6. Avatar for Property Update

    November 9, 2016 @ 10:53 am Paul

    Hi Ed,
    I’ve got two questions:
    1. If I have two investment properties under a personal name (not a business or company), can I set up one LOC and use this to pay for renovations on both properties? Or do I need a separate LOC for each property?
    2. Is the idea to ever pay off and close out the LOC or do you just leave it there?


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      November 9, 2016 @ 11:12 pm Ed Chan

      Hi Paul
      Thanks for your question
      1. Yes you can set up one LOC and use it for renovations for both properties. As the money/loan was used for investment purposes the interest is deductible. However you will need to work out a portion of the interest for one property and a second portion for the other property based on the dollar value spent on renovations for each respective property.
      2. Naturally if you pay off the LOC it will save you paying any interest. However you would pay off a private loan first since the interest is not deductible ahead of a LOC which is deductible.


  7. Avatar for Property Update

    May 24, 2017 @ 12:20 pm Daniel

    Hi Ed,
    2 Questions:
    1) Can you use LOC to pay off mortgage payments for other investment properties?
    2) Where should you put your wages and rental income? like a savings account? or should you put it in offset account for the other investments


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      May 24, 2017 @ 8:36 pm Michael Yardney

      You can use your line of credit for whatever you want including making mortgage payments – but don’t mix personal and business uses

      Also an offset account is usually the right place to put surplus funds and minimise your interest payments, but retain flexibility. But again don’t mix personal and business funds in the same account – get a proficient mortgage broker to set things up for you


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