Thanks in advance to all those that can offer their knowledge.
On the 31st December 2010 we moved from our family home and commenced renting it out. The loan on our family home is an interest only loan and we have my hubbys pay go into this account and I pay bills from it as well. The loan was initially taken for $365000(this was drawn down for the cost of the property) and we at this stage still owe the $365000. We have never purchased any large items from this loan account just everyday, monthly yearly bills.
We bought this home back in 2002.We are now receiving rent for the old family home and are also paying rent where we moved to( due to hubbys work)
On lodging our tax return we gave the accountant all the bank statements and documents from the property manager for it.
We have now been advised that as my hubbys pay goes into this account and we redraw for everyday living that we are unable to claim the interest as a deduction but the rent is now an income.
It has only been rented for the 6 months but based on the information from the accountant even though we are losing money as the interest repayments are more than the income received plus expenses that we can do nothing about it for this tax return or for any future ones.
PLease help!!
Hi Khristie,
It sounds like you have an equity loan or home loan with offset account, is this right?
I think it is true if you've been paying bills out of your equity loan account, the accountant cannot seperate the interest that is paid on your daily expenses (with are non deductible of course) and the actual interest attributed to the investment. Lucky, you've only been renting it for 6 months so it's not too costly but I can understand your frustration here.
I think the only course of action is to re-finance the loan as an investment loan (either with existing lender or changing lenders) but you may face an issue as investment loans are typically 90% Loan-Value-Ratio. This means the lender would only lend you $328,500 if the value of the house is $365,000 still. However, if the value of the property has risen by more than 10% since you bought it, then you should have no problems (except for re-financing costs).
Hope this helps,
Darren.
Thanks for the reply Darren.
Some additional information that I should have noted is that we have a second rental property which is also managed by the same property manager. At the end of everymonth the income after expenses she has paid is also put into this account. I then each month pay from that loan the interest only as well as transfer the payment to the other account for the second rental property. Any moneies that are left over are used to pay electricity, gas, rates x 2, water x 2, telephone etc etc.
We are currently getting the house valued (last value was at $600k) to see if we can get a better interest rate.
If we are able to refinace for the same amount and have it drawn up as tennants in common ( as a don't work, 5 kids) would we be able to claim it 2011-2012 just in my hubbys tax return.I will also organise another account where the income and bill payments can be used and then just transfer the repayments each month. so the rental property accounts will only show the interest only payments.
Does this sound right??I think the second rental property is fine, assuming it has it's own loan. The problem with the other loan is that you've paid non-deductible expenses out of it (eg. groceries, bills) and so the accountant cannot seperate the interest for investment purposes from the interest accrued through normal daily spending. This strategy was fine as long as it was your residence, but now that it's an investment property you need to seperate those expenses from the loan or refinance.
Yes, to answer your question, if you refinance for the same amount and just pay your daily expenses out of a regular bank account you should be able to claim all the interest in next year's tax return (2011/2012).
Make sure you run that by your accountant or financial advisor as well as I don't know your full situation, just commenting on what I see.
Darren.
Thanks again Darren for all your knowledge.
I think you have gotten yourself into a big mess unfortunately.
Refinancing won't help you claim any of the interest because the interest will retain the character of the original borrowings.
Everytime you make a deposit to the loan this is a repayment.
Everytime you make a withdrawal from the loan this is new borrowings.So if you withdraw $100 for groceries the interest on this new $100 loan will not be deductible.
If you are having pays put directly into the loan then this would mean you would be repaying the original loan by this amount with each repayment.
You then take money out, so this will be reborrowings. The end result would be a large loan with none of it attributable to the purchase of the original property and therefore none of it deductible.
Refinancing will fix the problem from now on, but not the previous borrowings.
What you should do is to get the original loan figure and then deduct from this each deposit you made (disregarding the withdraws). This will be the loan amount attributable to the original purchase. And therefore the part of the loan that is deductible.
You should refinance this amount as one split, with an IO loan, and the other portion with a separate split. You can then distinguish the deductible from the non deductible and pay down the non deductible loan first.
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
khristie wrote:Thanks for the reply Darren.Some additional information that I should have noted is that we have a second rental property which is also managed by the same property manager. At the end of everymonth the income after expenses she has paid is also put into this account. I then each month pay from that loan the interest only as well as transfer the payment to the other account for the second rental property. Any moneies that are left over are used to pay electricity, gas, rates x 2, water x 2, telephone etc etc.
We are currently getting the house valued (last value was at $600k) to see if we can get a better interest rate.
If we are able to refinace for the same amount and have it drawn up as tennants in common ( as a don't work, 5 kids) would we be able to claim it 2011-2012 just in my hubbys tax return.I will also organise another account where the income and bill payments can be used and then just transfer the repayments each month. so the rental property accounts will only show the interest only payments.
Does this sound right??I replied before reading the whole thread.
It seems even more complicated now as you appear to be borrowing from the LOC to pay the interest on the other investment property. I fear you are going to have some high accounting bills to work out the interest – that is probably why your accountant said none was deductible (which is probably incorrect).
You also cannot simply change from Joint Tenants to Tenants in Common by refinancing, you would have to do this with a transfer at the same time as the refinance. Stamp duty would probably be payable, unless your property is in VIC (maybe)
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 Terry,
I have received some advise that if we were remove all deposits and withdrawals from this home loan and leave as just the interest only payments and deductions that we will be back on track for 2011-2012 tax return.
I have also been told that there is alot of work for my new accountant to do, to work out the interest that can be claimed as a deduction but it is possible.
On this advise and speaking with a few other finance, solictor and accountants. We have decided to move to another accountancy firm. Don't know how much we will save for the previous 6 months though as we now have to pay 2 accountancy firms billskhristie wrote:Thanks Terry,I have received some advise that if we were remove all deposits and withdrawals from this home loan and leave as just the interest only payments and deductions that we will be back on track for 2011-2012 tax return.
I don't know about that.
You have a mxied purpose loan now, but the ATO may allow an exception where money is recouped and repaid and it could be possible:
see paragraph 17 of TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001If your accountant is giving the go ahead then make sure you get it in writing.
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
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