TLDR
- The “purpose rule” drives deductibility. Interest on equity you release is deductible only when the borrowed funds are used for an income-producing purpose.
- Keep your trails clean. Separate loan splits and documentation that clearly link each drawdown to a specific investment are essential.
- Trusts don’t distribute losses. Negative gearing benefits are trapped in the trust and carried forward until offset by future trust income or capital gains.
- Personal → Trust funding needs paperwork. When you draw equity in your name and on-lend to a trust, use a formal loan agreement and maintain a clear fund trail.
- Trusts are powerful but situational. They enable income and capital gains distribution, intergenerational planning, and risk protection—but may reduce short-term cash-flow benefits for some investors.
What This Article Covers
- Equity loans 101 & the purpose rule
- Owner-occupied vs investment equity release
- Loan splits and record-keeping that your accountant will love
- Funding a trust with personal equity (and how to document it)
- Who should (and shouldn’t) consider a trust
Equity Loans 101: The Purpose Rule
When you extract equity—whether from your home or an investment—the interest deductibility depends on what the funds are used for, not where they came from.
- Deductible: Deposits and costs for an income-producing asset (e.g., an investment property).
- Not deductible: Lifestyle spending (cars, boats, holidays) or private use.
Action step: Document the end use of every dollar. Keep broker letters, drawdown confirmations, trust loan agreements (where relevant), contracts, and settlement statements together to show a direct line from equity → asset.
Home vs Investment Equity: What Changes?
From a tax perspective, both can be deductible if the purpose is income-producing. But consider:
- Risk: Which property you secure matters (e.g., protecting the family home).
- Serviceability: Lenders assess the new debt against your income/expenses; negative gearing may be recognised for servicing—even if equity came from your home.
- Entity choice: If funds support a trust purchase, some lenders won’t factor negative gearing the same way.
Bottom line: Model risk, deductibility, and serviceability together—optimising one while ignoring the others often backfires.
Common Structuring Mistakes (and Fixes)
1) Bundling everything into one facility
- Problem: Private and investment debt mixed together muddies deductibility.
- Fix: Use separate loan splits for each investment purpose. One split = one asset/use.
2) No paper trail when on-lending to a trust
- Problem: Drawing equity personally and “helping” a trust without documents risks denial of deductions.
- Fix: Put a formal loan agreement in place. Funds should move personal loan → trust bank account → settlement in a clean trail.
3) Assuming joint equity = joint deductions, always
- Nuance: If a jointly owned property funds an investment owned solely by one spouse, you may need two calculations: one for the original joint loan and one for the new split linked solely to the purchasing owner.
- Fix: Structure split(s) and ownership intentionally, then document linkages.
Best-Practice Record-Keeping (What Accountants Want)
Treat each property like its own mini-business:
- Dedicated loan split per asset/purpose
- Separate offset(s) where helpful to avoid contamination
- Source-to-use trail: Drawdown → trust/personal account → deposit/settlement
- Consistent statements: Regular payments that match loan schedules
- Early contact: Call your accountant before you extract equity, not at tax time
Funding a Trust With Personal Equity: How to Do It Right
Using home equity to help a trust buy a property is common—and workable—if you:
- Create a loan agreement between you (lender) and the trust (borrower).
- Transfer funds from the personal loan split to the trust bank account, then to settlement—no detours.
- Book entries correctly:
- In your return: interest income = interest expense (usually neutral overall).
- In the trust: claim the interest expense connected to the investment.
Reminder: Trusts cannot distribute losses. Negative gearing accumulates within the trust and can be used later against trust income or capital gains.
Trusts: Who They Suit (and Who They Don’t)
Good fit when you need:
- Income and CGT distribution flexibility to lower-tax beneficiaries
- Asset protection (e.g., high-risk professions such as medical specialists)
- Intergenerational planning, especially with corporate trustees and testamentary trusts
- Portfolio growth across properties and shares under a single deed
Think twice if you need:
- Immediate personal cash-flow relief from negative gearing (trusts trap losses)
- Simplicity over structure (trusts introduce admin, resolutions, and compliance)
- Set-and-forget: trusts require active documentation and annual distribution decisions
Tip: Your trust deed must explicitly allow the investments you plan. Use a corporate trustee for continuity—changing directors/shareholders later is simpler than changing the owner on title.
FAQs
Is interest deductible if I release equity from my home to buy an investment? Yes—if the funds are used for an income-producing asset and you can evidence the purpose and flow of funds.
Can I mix private and investment spending in one split? You can—but you shouldn’t. It complicates (and can jeopardise) deductions.
If my spouse and I own the equity source jointly, but only I buy the next property, who claims the interest? Often you’ll need two calculations: the original joint debt portion and the new split tied solely to the purchaser. Properly structured splits make this clean.
Do trusts waste my negative gearing?Not wasted—carried forward inside the trust. Losses can offset future trust income or capital gains.
Why do professionals in high-risk fields prefer trusts? For asset protection and distribution flexibility, especially when personal tax rates are high.
Editor’s Note (Australia-Specific)
Rules and thresholds (e.g., stamp duty/land tax by state, or trust surcharges) change frequently. This article is a general discussion only—not personal or financial advice. Speak with your accountant and financial planner before acting.
How to Action This?
Want help designing a clean equity-and-trust structure and building a borderless, data-driven portfolio?
- Book a discovery call with InvestorKit’s research-led team.
- Ask about ARI (Advanced Rental Income) Calculator to project cash flow and growth over 10–30 years.
- If you need specialist tax input, we can coordinate with your accountant or introduce one experienced in property and trusts.
About This Episode
This article distils insights from The Property Nerds conversation with Ronesh (Incentum Group), joined by Arjun Paliwal (Founder & Head of Research, InvestorKit) and team—covering equity loans, the purpose rule, and trust mechanics for Australian investors.
Disclaimer: The information above is general in nature and doesn’t consider your personal circumstances. Always seek licensed professional advice. Guests may have commercial relationships with companies mentioned.