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HumphreyBare(Newbie)Newbie
29 Nov 2022

Hi,

I own two houses. One is a rental property with about 200K owing. The other is where we live and I still owe about 500K.

An accountant has suggested to me that I should be able to use equity in my rental property to take out a loan to reduce the amount owing on the house we live in.

The end result of this would be that I have a larger tax-deductible interest debt on the rental property and a much smaller amount owing (and non-deductible interest debt) on the house we live in.

My understanding, is that this is not permissible under Australian tax law, as the purpose of the new loan taken on the rental property is not for an investment, but is to pay down other debt.

Has anyone done this before? or can anyone verify if the accountant's advice is correct?


Thanks

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Bruce4Tax(Taxicorn)Taxicorn
30 Nov 2022

An accountant has suggested to me that I should be able to use equity in my rental property to take out a loan to reduce the amount owing on the house we live in.

The end result of this would be that I have a larger tax-deductible interest debt on the rental property and a much smaller amount owing (and non-deductible interest debt) on the house we live in.


You need a new accountant - this is just wrong. Deduction for interest follows purpose of the loan, not the security used.


My understanding, is that this is not permissible under Australian tax law, as the purpose of the new loan taken on the rental property is not for an investment, but is to pay down other debt.


Correct - you should have been sitting on the other side of the desk!



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Most helpful reply

Bruce4Tax(Taxicorn)Taxicorn
30 Nov 2022

An accountant has suggested to me that I should be able to use equity in my rental property to take out a loan to reduce the amount owing on the house we live in.

The end result of this would be that I have a larger tax-deductible interest debt on the rental property and a much smaller amount owing (and non-deductible interest debt) on the house we live in.


You need a new accountant - this is just wrong. Deduction for interest follows purpose of the loan, not the security used.


My understanding, is that this is not permissible under Australian tax law, as the purpose of the new loan taken on the rental property is not for an investment, but is to pay down other debt.


Correct - you should have been sitting on the other side of the desk!



JodieR_ATO(Community Support)Community Support
30 Nov 2022

Hi @HumphreyBare,


The information @Bruce4Tax advised is correct and so are you. What we look at is the use of the borrowings. If you redraw an amount for personal use, you can't claim the interest deduction even if it's against an investment loan.


This information is also listed on our webpage about interest expenses under what you can't claim. You may want to point your accountant in this direction.

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