We currently have 3 investment properties and want to know if you can do the following.
We want to buy a new family home on acres and need another 300,000 for the transaction.
We currently only pay interest on the investment properties. Can we write back the interest to the principal each month? In doing so our principal would increase by $50,000 each year over the 3 properties but our family home loan would be paid off in 6 years. Can we still write off the interest on our tax even though we are not paying it? Would the bank allow this? Debt to loan ration on the current value of the properties is sitting at 70%. Yes, the principal is increasing by $50,000 per year but the properties would be appreciating as well.
ThanksWhat you are talking about is referred to as ‘capitalising interest’.
Generally, you can capitalise interest only on line of credit product (but not all banks allow this). However, you are not entitled to a tax deduction for the interest charged on capitalised interest (e.g. interest on the additional $50,000 p.a.). This is the subject of an action in the Court of Appeal. The plaintiff being the lovely ATO! They are appealing a decision handed down by the Federal Court of Australia in Hart v Commissioner of Taxation [2001 ] FCA 1547 (2 November 2001). If you want more information then perhaps do a search on the web.
If the ATO wins then there will be legal support for denying deductions. If they lose then I would consider it highly likely that the Government would legislate that deductions are not allowable. Either way the government has too much money to lose and I don’t think they will allow people to enter into these kinds of arrangements.
The case is a bit complex and I think one of the reasons that the Hart’s won is because the loan documents stipulated that they could not repay monies into the investment account. This is quite distinct from electing to capitalise the interest. Maybe something to watch out for.
BUT please seek professional tax advice on this.
Cheers
Stu
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