RENTAL INCOME

Hi,
I’m not quite sure what you mean, but I think you may be confusing claiming interest on a split loan against tax with using rent to pay down a split loan.

I’ll try to clear this up (if that’s what’s happened)
1. A split loan is where you refinance your mortgage for your primary place of residence(PPOR) to purchase an investment property.
2. You then apply all the interest from the whole mortgage against the investment portion of the loan and leave the PPOR principal to reduce as payments are made.

In this way the rent from the investment property is paying down your PPOR mortgage giving you more equity in your home (which upon sale is CGT free). This also means you then claim the interest for both portions of the split loan as interest on the investment property effectivley making it a tax deduction.

Unfortuanately this doesn’t fool the ATO. They really aren’t as thick as we’d like to think and they have made a ruling that says you can’t do this. You can only claim the proportion of interest attributable to the investment property as a tax deduction, the rest you have to suck up. You can of course apply rent to anything you like, it’s just income like any other. The only difference in the eyes of the tax department is expense.

The basic premise is that expenses incurred to gain income can be deducted from the taxable amount of income declared. Interest on a mortgage for your PPOR is not an expense to gain income. Interest on a mortgage on an investment property is expense to gain income so you can deduct it from your taxable income (effectively paying for the expense with pre-tax dollars). Dont’ mix the two up or the ATO will hunt you down and skin you alive! [eek]