A question on tax-deductible interest

it would be once you move out.

Terryw
Discover Home Loans
Mortgage Broker
[email protected]

Just Allan,

Terry is correct but just a word of warning:
Traditionally, interest is claimable only on a loan where the actual money borrowed is used directly to produce income i.e. buy the income producing property.
It is dangerous to use a line of credit facility on a rental property loan when you will be drawing funds back out to pay private expenses. Based on the principle that the interest on a loan is tax deductible if the money was borrowed for income producing purposes, the interest on a line of credit could easily become non-deductible within 5 years. For example: A $100,000 loan used solely to purchase a rental property is financed as a line of credit. To pay the loan off sooner the borrower deposits his or her monthly pay of $2,000 into the loan account and lives off his or her credit card which has up to 55 days interest-free on purchases. The Commissioner now considers there to be $98,000 owing on the rental property. In say 45 days when the borrower withdraws $1,000 to pay off his or her credit card the loan will be for $99,000. However, as the extra $1,000 was borrowed to pay a private expense, viz the credit card, now 1/99 or 1% of the interest is not tax deductible.
The next time the borrower puts his or her $2,000 pay packet into the account the Commissioner deems it to be paying only 1/99 off the non-deductible portion i.e. at this point there is $96,020 owing on the house and $980 owing for non-deductible purposes. When, 45 days later, the borrower takes another $1,000 out to pay the credit card, there will $96,020 owing on the house and $1,980 owing for non-deductible purposes so now only 98% of the loan is deductible, etc, etc.
In addition to the loss of deductibility, the accounting fees for calculating the percentage deductible could be high if there are frequent transactions to the account. The ATO has released TR2000/2 which confirms this and as it is just a confirmation of the law it is retrospective.
To ensure deductibility and maximise the benefits provided by a line of credit you will need an offset account that provides you with $ for $ credit. These are two separate accounts – one a loan and the other a cheque or savings account. Whenever the bank charges you interest on the amount outstanding on your loan they look at the whole amount you owe the bank i.e. your loan less any funds in the savings or cheque account. This type of account is offered by several banks.
A loan setup incorrectly will lose all deductibility within 5 years on average. If your loan is not set up correctly it is important that you act to change it immediately as every day erodes your interest deduction.

Julia Hartman
[email protected]
http://www.bantacs.com.au

Julia 1 question. We purchased our home for $157,500 – first home buyers grant and ended up with a loan of 142,000. ANYWAY we later re-financed and drew back $20,000 to purhcase a car So now our total loan stands at about 157,000 (as we made extra repayments) SO now that our property is about to become a rental what interest cvan I claim? do I have to tell my accountant that we borrowed some equity for a car and let him do the figures? Thanks Julia

Just Allan,
137/157 of the interest on the loan will be deductible against the rent. The other 20/157ths is only deducitble if the car is used to produce income.
If the car is not income producing I suggest you split the loan when you move out. Get a loan for $137,000 on interest only and another for $20,000 P&I. Concentrate on paying off the smaller loan.
As for what to tell your accountant. You sign the tax return to take responsability.

Julia Hartman
[email protected]
http://www.bantacs.com.au