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Re: Tax Deductions On Investment Loans

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Newbie

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Hi All,

Currently I am refinancing an investment property x to purchase another property y. The property I am buying will be rented for 6 months after settlement afterwhich I will look to move into it (it will then become my primary residence). As there will be a period were property y has become an investment I have a number of questions related to deducations, they are as followed:

 

  1. Will the full interest on the investment property x be duductable after refinancing the loan? I know the interest on property x will not be deductable ?
  2. Will I still be able to deduct borrowing expences related to property y which is claimed over the next 5 years?

Thanks

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Hi @tony_955

 

Welcome firstly to our Community, I trust we can be of help now and into the future.

As to your query put very simply we allow deductions when it is investment related and when it is not or ceases to be we do not.

 

1. This information has relevance for you:

Clients must separate the interest that relates to the rental property from any interest that relates to the private use of the funds. Where clients borrow money to buy a new home and then rent out their previous home, if there is an outstanding loan on the old home, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income, whether or not the loan for the new home is secured against the former home. For further information see our Rental Guide 2019 page 15 Interest on loans.

 

2. As to Property Y its borrowing deductions are only relevant while the property is an investment property which would need to be proportioned respectively.

 

As you are already probably aware when you sell Property Y it will have some partial CGT implications as the  Main Residence Exemption will only kick in once you take up residency.

 

I trust this will be of help to you.

Kind regards

MarkA

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Devotee

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I would suggest you speak to a professional tax agent who has knowledge of investments properties.

 

If you are refinancing one loan then after the 6 months period when you move into property x then you will have a mixed loan. A tax agent may suggest splitting the loan so there are distinct amounts (current IP loan amount as one split and the amount for the new property as another). This would remove the hassles associated with an a mixed purpose loan.


As to borrowing expenses they may need to be proportioned to each property. 

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Best answer

Community Support

Replies 2

Hi @tony_955

 

Welcome firstly to our Community, I trust we can be of help now and into the future.

As to your query put very simply we allow deductions when it is investment related and when it is not or ceases to be we do not.

 

1. This information has relevance for you:

Clients must separate the interest that relates to the rental property from any interest that relates to the private use of the funds. Where clients borrow money to buy a new home and then rent out their previous home, if there is an outstanding loan on the old home, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income, whether or not the loan for the new home is secured against the former home. For further information see our Rental Guide 2019 page 15 Interest on loans.

 

2. As to Property Y its borrowing deductions are only relevant while the property is an investment property which would need to be proportioned respectively.

 

As you are already probably aware when you sell Property Y it will have some partial CGT implications as the  Main Residence Exemption will only kick in once you take up residency.

 

I trust this will be of help to you.

Kind regards

MarkA

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Newbie

Replies 1

Thanks Mark for answering my question, though I am still a little confused.

 

My current situation is that I am currently renting but I also have an investment property (property x).  I want to refinance my property x to purchase another property (property y). Property y is currently being rented out and the lease does not end until 6 months after settlement of property y. Is property y classified as an investment at the time of purchase as it is income generating for the 6 months after settlement ? 

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Hello @tony_955,

 

While the property is being rented you are able to claim the deductions associated with it. Once it becomes your personal residence you will no longer be able to claim deductions against it and will need to apportion your costs associated with the time you had it as a rental property.

 

For example your borrowing expenses/interest for the year would only be allowable for the six months. If you made repairs or made improvements to your new property you would only be able to depreciate/claim deductions for that six months.

 

In regards to your property (X) which you are refinancing the loan for if you have already paid it off then you won’t be able to claim the interest on that property as the loan associated with it has been finalized. If you still had an amount remaining you would be able to claim on the amount still associated with that property not the new loan which was used for the purposes of purchasing a private residence (after the six months of renting).

 

Luke S