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Deductibility of Investment Loan break costs when property is sold or re-financed

Newbie

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Replies 1

In August 2020 , I sold an residential investment property that had a connected Fixed 3 Year loan ending in May 2022 to it.

 

Firstly, my original intention was to use the proceeds from sale (cash ) to buy another residential investment property and connect the existing Fixed IO loan.  My accountant said this would be ok,   except today he advised that would not be okay as If i pay for the new property in cash, I cannot claim the previous Loan.  I need to take out a new Loan for the next residential investment property , which means another application and serviceability.   If this is true...

 

So, now the question, 

I want to pay out the Fixed IO Loan loan out which will incur break costs ($4,800) .  The break costs represents the "non-lending loss" from the Bank's perspective -  covering loss of interest from the borrower.. In this scenario, the Loan was fixed 3.99% and now rates are lower, so they are wanting the future interest now as a break cost.

 

How can I use the Break costs of $4800 in terms of an ATO Tax Return as an Individual?

1. a selling costs as part of the Capital Gains Tax calculation, as part of sale in 2020/21

2. a deduction as an interest expense in the current year

3. something else?

 

------- Next Scenerio -----

 

Now , a re-financing scenario - I have another residential investment property with a 3 year FIxed loan.  I wish to re-finance the loan to secure a lower rate - from 3.99% to 2.59%.  The break costs will be $5000.  The future savings over 3 years will be $14,000, and in the first year will be $2,000.

 

How can I use the Break costs of $4800 in terms of an ATO Tax Return as an Individual?

1. a deduction as an interest expense in the current year.

2. borrowing expenses over 5 years

3. part of the CGT calculation in the future when property is sold.

 

 

 

Thanks for your time.

 

 

 

 

 

1 ACCEPTED SOLUTION

Accepted Solutions

Most helpful response

ATO Community Support

Replies 0

Hi @PaulZ,

 

Generally they are deductible in the year the expense was incurred, they are viewed as a mortgage discharge fee. We have answered this on our forum previously, you can view our response here.

 

However, if you have already sold the property and incur the expenses thereafter, you can view information on the ruling TR 2004/4 (10-14) Interest incurred after assessable income. Whilst we can guide you to it, we cannot interpret the legislation. If you would like further clarity on this please write in to our early engagement team.  

 

All the best.

1 REPLY 1

Most helpful response

ATO Community Support

Replies 0

Hi @PaulZ,

 

Generally they are deductible in the year the expense was incurred, they are viewed as a mortgage discharge fee. We have answered this on our forum previously, you can view our response here.

 

However, if you have already sold the property and incur the expenses thereafter, you can view information on the ruling TR 2004/4 (10-14) Interest incurred after assessable income. Whilst we can guide you to it, we cannot interpret the legislation. If you would like further clarity on this please write in to our early engagement team.  

 

All the best.