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Cash out refinancing on a rental property

Newbie

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I own an investment property that is rented out. The current mortgage is $125k. I am looking to purchase a holiday house and trying to work out the best way to arrange the financing and the tax implications. Wondering how the tax deduction for interest would work if I were to refiance the mortgage on the rental property to withdraw some of the equity. Would I be able to claim the full interest on the new loan, or would I have to split the interest into investment and personal portions. Eg. if the current loan is $125K, I take out $200k in cash for personal use would I be claiming the interest on the $125k only (38% of the interest on the new loan) or on the $325k total (100% of the interest on the new loan)?

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Most helpful response

ATO Certified Response

ATO Community Support

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Hi @CS2,

 

What we look at is the use of borrowed funds. If you are redrawing for personal use then you can only claim the interest portion of the loan that relates to the income producing asset. You will need to apportion the loan to only claim investment expenses. The personal use amounts are not deductible. In the event you are not aware you can only have one main residence. Your holiday home will have capital gains tax implications when you sell/dispose of it.    

 

Please use the links below for further assistance.

 

Interest expenses.

Main residence.

 

All the best.

1 REPLY 1

Most helpful response

ATO Certified Response

ATO Community Support

Replies 0

Hi @CS2,

 

What we look at is the use of borrowed funds. If you are redrawing for personal use then you can only claim the interest portion of the loan that relates to the income producing asset. You will need to apportion the loan to only claim investment expenses. The personal use amounts are not deductible. In the event you are not aware you can only have one main residence. Your holiday home will have capital gains tax implications when you sell/dispose of it.    

 

Please use the links below for further assistance.

 

Interest expenses.

Main residence.

 

All the best.