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Claiming interest on renovation loan on rental property

Newbie

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Hi,

Background story:

I've refinanced my current rental home loan account to take out an additional 50k for the purpose of renovating the rental property (at that time it was a principal residence house), the bank dispursed the 50k into my personal transaction account. The next day I moved that 50k back into the rental home loan account.

The question is;

1) Whether the interest on the 50k in the rental home loan is tax deductable. Is that 50k considered a personal deduction rather than a rental deduction. Bearing in mine that the 50k is not used yet. It is just sitting in the rental home loan account as it was transferred back to the rental home loan account from the personal transaction account the next day.

 

The accountant says that NO I cannot claim the interest on that 50k loan as it was transferred to my personal transaction account. If the bank was to transfer it to the rental home loan then I can claim the interest on the 50k. I challenge the accountant saying that the 50k was then transferred back to the rental home loan. It was not spend on any personal item. In saying that the accountant stress that regardless if the money is put back into the home loan or if you use that 50k to pay the contractor for the renovation, it is NOT tax deductible because the money went into your PERSONAL transaction account and then out.

 

When I ring the ATO, ATO says YES I can claim the interest on the 50k loan as it was not used for private even though it was transferred to the personal transaction account. The next day the full amount was then transferred back to the home loan.

 

I'm comfuse with this 2 contradicting answers. I would like to know which answer I should follow in order not to be penalised when I'm being audited. I would like to know if I can or I cannot claim the interest deduction on the 50k loan.

 

Thanks in advance.

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Community Support

Replies 2

Hi @euclyn ,

The first thing is to check that you said, 'at the time, it was a principal residence house') - does this mean that you were living in the house whilst you were doing renovations? If the house were used for private purposes during renovations eg lived in it as your main residence, than you would not be be allowed to claim interest on this loan (at that time). This is explained in Rental expenses you can claim now (under section, Interest expenses'). You may be allowed to claim depreciation on some renovations, but this may need to be rental expenses claimed over several years .

 

On the other hand, if the home loan turned into a rental property loan, then the interest on that loan, if it was not used for any period for private purposes, could be claimed while (quoted from above link) - "..the property must be rented out or genuinely available for rent in the income year you claim a deduction." (italics added). In other words, the period in time when the house becomes available for rent or rented, is when you can start claiming loan interest expenses.  

 

Please note that this is a community forum, advice is general in nature. If you more questions regarding the transfer of loan amounts of personal to home loan affecting its deductibility, you could apply for an Early engagement advice request .

 

Thanks,

3 REPLIES 3

Most helpful response

Community Support

Replies 2

Hi @euclyn ,

The first thing is to check that you said, 'at the time, it was a principal residence house') - does this mean that you were living in the house whilst you were doing renovations? If the house were used for private purposes during renovations eg lived in it as your main residence, than you would not be be allowed to claim interest on this loan (at that time). This is explained in Rental expenses you can claim now (under section, Interest expenses'). You may be allowed to claim depreciation on some renovations, but this may need to be rental expenses claimed over several years .

 

On the other hand, if the home loan turned into a rental property loan, then the interest on that loan, if it was not used for any period for private purposes, could be claimed while (quoted from above link) - "..the property must be rented out or genuinely available for rent in the income year you claim a deduction." (italics added). In other words, the period in time when the house becomes available for rent or rented, is when you can start claiming loan interest expenses.  

 

Please note that this is a community forum, advice is general in nature. If you more questions regarding the transfer of loan amounts of personal to home loan affecting its deductibility, you could apply for an Early engagement advice request .

 

Thanks,

Newbie

Replies 1

Hi,

The interest is not claimed when the property was a primary residence. The interest is only claimed when it's fully rented out. As there is a requirement to determine a private percentage, a spreadsheet calculation is required for the ins and out of the home loan. Therefore it needs to go way back when it was still a primary residence, the private percentage calculation doesn't only go back to the time the rental property was first rented out.

Because it goes all way back when the renovation loan was first added, the question is whether the 50k at that point is considered a "private" or "deductible". Bearing in mind I'm not claiming any interest at that point because it was a primary residence. I just need to put the figure in the spreadsheet to calculate the private portion. I'm only claiming the interest when it is first rented out. 

The Accountant say I have to put it under private at that point the loan was drawn because the bank has transferred the money out into a "private" account. At that time the money was not used for "private" because the same amount of money went back into the rental home loan the next day.

The accountant stress that anything that is transferred out from the rental home loan to a "private" account is considered "private" so even though you tranfer the money out to your "private" account then transfer the same amount back into the rental home loan account you still can't claim the interest on the rental home loan. 

Is that true?

 

 

 

 

Community Support

Replies 0

Hi @euclyn,

 

Thank you for reaching out to us. The deductibility of interest is determined by the purpose of the loan and how the borrowed funds are used. You can claim the interest charged on the loan you used to:

  • purchase a rental property
  • purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
  • make repairs to the rental property (for example, roof repairs due to storm damage)
  • finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)

You can also claim interest you have pre-paid up to 12 months in advance. If any portion of the loan is used for private purposes you would need to apportion the loan interest charges accordingly.

 

Hope this helps.

 

Regards,

Jodie2.