I've asked my accountant a few questions relating to this topic and I found his responses a bit troubling. I was hoping others with more experience in this area than me may be able to confirm if it is true or false.
My accountant basically said the following:
If I move from my PPoR (which would become an investment property) into a new PPoR, thus changing it's purpose, none of the interest charged holding the asset would be tax deductible, because according to the ATO for tax purposes a property cannot be 're-classified'There may be a little more to it than that, but hopefully you get the gist. It sounds very strange to me. Has there been a change regarding this from the ATO? What options do I have?
Can someone please shed some light on this?
Thanks
Sounds strange to me – and maybe you have misheard your accountant?
If you currently have a loan on a property which you are living in, the interest is not deductible as the funds were borrowed to buy a private asset. But if you were to move out of that property and rent it the interest on the existing loan would be deductible as the asset is now income producing. The purpose of the bororwings was to buy a property and the deductibility depends on the use of the property.
However, if you were to increase your loan before moving out and use these funds for the new property then the interest on this portion will not be deductible as the funds were used for private purposes.
Double check and then if your accountant doesn't agree with this get another opinion – or it could cost you dearly.
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 for your imput Terry.
I thought it sounded very strange also. I even asked him if he handled this sort of thing very often? He said he has/does for clients and himself and as far as the ATO are concerned it's a black and white situation.
I know people who have done this and it's a fairly common thing from what I hear. I would also prefer to hang onto the property.I'll contact the ATO and keep researching.
Your accountant may be referring to the interest charged while your property was a PPOR. As a PPOR it is a non income producing asset so you would not be able to claim the holding costs up to the point in time that its state changed to investment. Also the PPOR is Capital Gains Tax exempt so you cannot add the interest onto the cost base as a holding cost.
However when you change the status of the property and have income being produced you have to get the house revalued by a valuer and keep a record of it as a Capital Gains tax event has occurred. The current Market Price becomes the cost base for capital gains tax purposes as you are changing the status of the property. (in case you sell it in say 10 years time)
Once you are renting out the house you should be able to claim the current interest costs. So if you do not rent it out for the whole financial year you can't claim the whole financial years interest costs. It has to be proportioned on how much of the year you rented it out for.
However I am not sure if you rent it out and decided to keep it in a ppor cgt exemption for six years where you would stand.See rental property guide page 11 where it states Property available for part-year rental
http://www.ato.gov.au/download.asp?file=/content/downloads/IND00191817n17290609.pdf
and
check out
http://www.ato.gov.au/individuals/content.asp?doc=/content/36557.htm&page=2&H2I recommend you ask the accountant if the holding costs they were thinking of are the previous holding costs as opposed to the future holding costs that you may not have incurred yet as an investment property and will only be claimable probably next year for the next financial years worth of holding costs against income received.
Usually holding costs refers to as an example
You purchase a block of land and never rent it out but decide to sell it for a capital gain then the interest charges and expenses can be added to the cost base to reduce CGT. But if you claim the interest against rent for the time you owned it then you can't add it to the cost base as it is double dipping. And if it was a PPOR you can't add it tothe cost base as there is no Capital gains tax due to exemption.I'm no expert, but the first thing I'd do is flip this on its head. If you bought an investment property and a few years later decided to move in as your PPoR would the ATO continue to allow tax deductions on the interests/costs because "for tax purposes a property cannot be 're-classified'". They obviously wouldnt (and definately dont), so my assumption is your accountant is wrong. As duckster says, maybe they're just confused about what you were talking about, but if not I'd say its time to find a new accountant.
Sorry, gentlmen to get off road, but need some advice from people far cleverer than I.
2 people purchase IP, both on title and mortgage documents. Can the highest salary earner claim all 100% of neg. gearing benefit.? Presuming married couple.Hydra
Hi Hydra
No if purchase as Joint Tenants then 50% each. If purchased as Tenants in Common percentage split as the Transfer Document.
Richard Taylor | Australia's leading private lender
Qlds007
Thank you Richard once again!
Hydra
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