Forums / Getting Technical / Finance / Question about refinance

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  • Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 174

    If you buy property 1, but you are unable to obtain a loan at that point of time, but you are able to refiance for a loan at a later date.

    In this case, can you still write off the interest for that loan as the cost of property 1? Or is it only allowed to be written off as cost of property 2?

    Let’s use an example:

    Let’s say I buy property 1 at $200K, but due to some circumstances (such as I have a new job and have not completed probation when the purchasing took place) I was unable to get a loan of $160K (assuming 80% ration).

    I then fork out $30K more to do a renovation and bring the property value up to $300K.

    Suppose say, 6 months down the track, I apply for a refinance and bank approves $240K loan (80% of $300k after renovation) for me to be used to invest in property 2.

    My question:

    Legally and tax wise speaking, am I allowed to use the interest for the entire $240K as cost of property 1?

    Or is it a requirement for me divide this into 2 portions, interest for the the original $160K as cost for property 1 and the interest for $80K top up for property 2?

    Or am I only allowed to write off the interest of entire $240K as cost for property 2 only?

    • This topic was modified 4 months, 1 week ago by Profile photo of Steven Steven. Reason: math error
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    How do you pay for it if you cannot get a loan?
    If you pay cash and then get a loan the interest could not be deductible.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 174

    If you pay cash and then get a loan the interest could not be deductible

    Even if Property 1 is a rental IP to start with, I still can’t deduct interest against it?

    Or are you saying you can’t even use that as a deduction against next investment (property 2?) as well?

    Isn’t that kind of unfair for people who couldn’t apply for a loan in a point of time? Say you get a real good bargain deal but you can’t apply for a loan at that point of time because you are in probation so you are forced to buy with cash, but you can apply for a loan after you complete your probation in your job.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Interest would only be deductible if you borrowed to acquire a property. If you pay cash you would have acquired it already. If you borrow against the property after settlement what you use the money for would determine deductibility.
    See s 8-1 ITAA97

    I don’t see it as unfair. Imagine that interest was deductible based on security for the loan. I would borrow against a property and have a tax deductible holiday.

    Speak to your tax adviser about how to structure things so that any purchase price is not cash. You might lend your cash to a trustee or to a spouse who buys it, then later refinances and pays you back etc

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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