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Capital gains tax exclusion for PPOR when used as security for investment loan

Newbie

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I have a home loan for my primary place of residence (PPOR). From this home loan, I can redraw funds to invest. I wish to understand the tax implications of borrowing to invest, so I asked a tax accountant for advice. They said that I could claim the portion of my home loan’s interest payments that I have used for investment as a tax deductable investment expense. They offered further advice that doing so would mean a portion of my PPOR would no longer be exempt from capital gains tax. I questioned this tax advisor as to whether they could point me at any information so I could learn more and they suggested I google “ato capital gains tax”. So I have decided to ask this question.

 

If I borrow money to invest, secured by my PPOR, should I plan for paying capital gains taxes on the portion of my PPOR that I have used as security for my investments?

 

Thank you!

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Most helpful response

ATO Community Support

Replies 2

*Updated by moderator to provide corrected information*

 

Hi @diy_curious,

 

You are correct, what we look at is the use of the borrowed funds. The website advises - You can claim a deduction for interest charged on money borrowed to buy shares and other related investments that you derive assessable interest or dividend income from. Only interest expenses incurred for an income-producing purpose are deductible.

 

If you used the money you borrowed for both private and income-producing purposes, you must apportion the interest between each purpose. You can only claim what is relevant to the income producing activity.

 

Your principal place of residence would remain unaffected in relation to capital gains tax. I think your adviser is talking about using your home to produce income. This is in the event you rent it out which you are not currently doing. 

 

Links -

Dividend and share income expenses. 

 

All the best.

3 REPLIES 3

Most helpful response

ATO Community Support

Replies 2

*Updated by moderator to provide corrected information*

 

Hi @diy_curious,

 

You are correct, what we look at is the use of the borrowed funds. The website advises - You can claim a deduction for interest charged on money borrowed to buy shares and other related investments that you derive assessable interest or dividend income from. Only interest expenses incurred for an income-producing purpose are deductible.

 

If you used the money you borrowed for both private and income-producing purposes, you must apportion the interest between each purpose. You can only claim what is relevant to the income producing activity.

 

Your principal place of residence would remain unaffected in relation to capital gains tax. I think your adviser is talking about using your home to produce income. This is in the event you rent it out which you are not currently doing. 

 

Links -

Dividend and share income expenses. 

 

All the best.

Newbie

Replies 1

Hi @BlakeATO , thank you for taking the time to reply to my question.

 

Regarding the deductability of the interest payments, I saw another question on the community forums called debt recycle strategy. It refers to TR 2000/2, which says:

 

23. Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible.

 

Are you aware of this ruling? Here's how I think it applies to my scenario:

 

I originally took out the home loan for non-income producing purposes - to buy my property. My use of the property is as my primary place of residence. I just live in it. I do not rent it out. I do not run a business from it.

 

If I borrow to invest, I'll be redrawing funds from my home loan for the purpose of buying shares - an investment that is expected to generate an income. According to the ruling, the portion of the cost of interest that is attributable to these share investments is deductable.

 

Is it possible, that the costs of interest are tax deductable under this circumstance, too?

 

And if I did this, would my property remain fully eligible for this main residence exemption?

Former Community Support

Replies 0

Hi @diy_curious,

 

We have amended our original response to provide accurate information.