Hi,
I was involved in a discussion on weather or not the interest on money that has has come from the refinancing of an investment property, can or cannot be claimed as a tax deduction?
I.e if you buy a property for $100k and 5yrs later its worth $150k, so you refinance and buy a car with the extra money. Can you claim this extra interest as a deduction directly related to the investment property?
In my thinking this is not legal?Please could someone clarify this for me?
Thanks.
Hi Scottybe,
It depends on how you use the money. If you use it for a non-income generating purchase (e.g. the car you mentioned), you cannot claim the extra interest as a deduction. However, if you use the money to put as a deposit on another investment property or share portfolio, you can claim the interest as a deduction.
Hope this helps.Is there any way that the ATO can track how you spent the re-drawn equity?
Thanks propertypower, i thought this might be the case.
Does anyone else have anything to add? Any other thoughts on this topic?I agree with PP, but if you buy a car, the interest may be deductible (or part of it) if the car is used for business purposes.
If you do claim the interest, the ATO could possibly track you down by realising the interest you are claim has suddenly increased and therefore you must have borrowed more. So they could pick it up and then ask you what you borrow the extra bit for.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
How could this legally work if at all? I am led to believe it's a loophole!Cheers.
How could borrowing to buy a car work?
It happens all the time. People borrow to purchase a car which is to be used for business purposes. It is not a loophole, but can be a legitimate expense if your business needs a car.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
No Terry thats not what i mean at all, i realise this happens all the time.
What i am asking, can someone refinance investment property and use the extra money for non investment lifestyle type purchases. E.G a pool for their ppor or a holiday to Greece etc? AND still claim all interest on tax? How would the coffers know what the money was being used for?Thanks.
Hi Scottybe,
In your example you cannot claim the interest as a legitimate deduction on that part of the loan to do with your pool or trip to Greece (non investment related expenses). Some LOC's let you split the loan into a number of seperate personal and investment accounts to help you seperate tax deductable and non tax deductable usage.
As to getting found out or not by the ATO – you might get caught or you might not. In a recent purge by the ATO on property investors plenty of people got netted for just that 'error'.
Bob Andersen
Positive Property Strategies
Just remember, when you are cheating the taxman, it is not just the tax man you are cheating….
It's those dirty stinking bludgers on the dole who don't want to work,
The poor innocent parras and quads, The grannies and grandpa's who have spent their life working for the betterment of Australia…
And our absolutely ridiculous politicians who go on the premise of making Australia a better place.
Plus all of the infrastructure to go with it.
So the next time you think of ripping of the tax department just bear that in mind.
Not that this is what you were thinking in the first place anyway.
Regards Mark.
I would just like to make it clear that i am not intending to rip off the tax department. I wanted to know this information to put end to a discussion which i was told this is possible legally, and i disagreed! So what you are telling me is that i am right in thinking this is not possible without risking tax audit trouble!
Thanks all for your input.Scottybe wrote:No Terry thats not what i mean at all, i realise this happens all the time.
What i am asking, can someone refinance investment property and use the extra money for non investment lifestyle type purchases. E.G a pool for their ppor or a holiday to Greece etc? AND still claim all interest on tax? How would the coffers know what the money was being used for?Thanks.
But if you were to refinance and take extra money, your deductions will suddenly increase compared with your last tax return. If you do not have any other income source, new property, share dividends etc in your tax return, the ATO may wonder what you used the money for. They can then send you a questionaire to fill out which may ask questions such as did you refinance any loans, or increase any loans.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry.
Scottybe,
Sorry if I offended you. I wasn't trying to imply you would even consider ripping off the taxman. This just looked like a really good place to post this as lots of people who would consider it would be reading just due to the nature of the subject.
All the best.
Mark
Hi All,
just wanted to add a bit to the original post.
Lets say the original property (make it an IP) was worth a bit more and you refinanced it.
Instead of using the extra equity to buy a car you used it to pay off your PPR.
You now own your home outright and decide to get a LOC against your home to purchase further IP's.I know the original loan was used to pay off a PPR loan but the ultimate purpose was to create a tax efficient structure to buy further income generating assets.
My questions are
1. Can i claim a tax deduction on the extra interest payments on the first loan?
2. Am i correct in understanding that i can claim a tax deduction on the LOC interest costs?Thanks for your help,
Cheers,
9ball.
9ball,
I am no expert but I would say that you would be up for a lot of additional and unnecessary costs doing it that way. Also, in order to get the LOC on your new home you will need to provide security and that would be your PPOR, so you wouldn't own it outright anymore.
It would be best to use the additional equity in the IP to buy new properties. The interest is then fully tax deductible. Using the equity to pay off your PPOR is not tax deductible, nor is the costs in setting up a new loan. If you did set up the LOC then you can claim the interest on the LOC so long as it is used to buy IP's.
Hi Ivan,
Thanks for your reply, i see the way you are thinking.
You want me to draw out the equity on the IP and use that for further purchases, that way i wont have the costs of setting up the LOC etc. And i can claim all the interest costs against my tax bill,seems perfectly sound, i agree.However the aim of doing it my way is to pay off all my personal non deductable debt on my home first. I know there will be the costs of setting up the LOC and offering my home as security but i think i will be better off doing it my way in the long run. I want to organise a sound platform to work from and i think this is the best way to do it. Moving forward from here all my debt should be tax deductable. And i wont have a personal mortgage anymore.
I just wonder if the extra interest payments on the 1st IP that i used to pay off my PPR can be offset against tax, considering that the ultimate purpose was to create a tax efficient structure to buy further income generating assets.
Cheers
9bal.
9ball wrote:Hi All,just wanted to add a bit to the original post.
Lets say the original property (make it an IP) was worth a bit more and you refinanced it.
Instead of using the extra equity to buy a car you used it to pay off your PPR.
You now own your home outright and decide to get a LOC against your home to purchase further IP's.I know the original loan was used to pay off a PPR loan but the ultimate purpose was to create a tax efficient structure to buy further income generating assets.
My questions are
1. Can i claim a tax deduction on the extra interest payments on the first loan?
2. Am i correct in understanding that i can claim a tax deduction on the LOC interest costs?Thanks for your help,
Cheers,
9ball.
Hi 9
If you used extra equity to pay off a PPOR loan, you are really borrowing to pay a loan. It is the purpose of the borrowings that the ATO looks at. So in this case, you would be borrowing to pay a PPOR loan = not deductible (this portion of the loan).
If you set up a LOC on your main home and use that to buy investments, then the interest should be claimable as the purpose of the loan is investment (each withdrawal from a loan is considered new borrowings).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
Thanks for the reply,
Do you think i am doing things the right way in paying off the PPR first and setting up the LOC?
I will give you a call in the new year to discuss my finance strategy and see what products are avaliable regarding a LOC and using this to buy 2 further IP's.
Cheers,
9ball
9ball
If you intend to stay in the property long term then sure pay down the PPOR and establish a new LOC which you can use for deposits and acquisition costs for new IP's.
However if you feel that you may sell the property and wish to keep it and rent it out purchasing a new PPOR then utilise an interest only loan with a 100% offset account.
Richard Taylor | Australia's leading private lender
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