Hi everyone,
My husband bought our townhouse under his name before we got married and we have been living in it in the last 4 years. We cannot afford buying a bigger house so we are thinking of renting a bigger house and invest our current home.
We have been putting all our savings into our home loan so we are thinking if we invest this townhouse, we will take out all the extra payments and invest them in an online saving account under my name. I think in this way we can claim tax return for my husband as the townhouse and the home loan are both under his name; and also we can earn interest from my online saving account.
But my friend told me the tax office won’t allow us to do this. I have checked the ATO’s website but cannot find any information related to our situation. Does anyone here do the same thing and find it doable?
Any information will be appreciated.
Row
Hi. If you withdraw the actual funds that you have paid in extra, you can do what you like with them…..it’s yours to use as you both see best. What some people do though is withdraw equity, claim the interest as a tax deduction, and use the funds for personal things, buying a car, holiday etc, and this is an absolute NO NO. Just something that you may like to think about though, even the best interest rate in a savings account will not be as high as the interest you pay on your houseloan/s, so what makes sense from where I am (and we have done) is stick the money either in an offset account or in the actual loan account (if it has redraw) and the money you save is not taxable, whereas the ‘interest ‘ is in another account. While if you do not earn any other income yourself, you will not earn enough money on the interest to pay tax, I thought I should just mention it. All the best. [cowboy2]
Hi Row
You would be better talking to your tax accountant and getting proper advice.
I suspect that you would need to withdraw the funds clearly some time before moving out to make sure ATO does not consider you are redrawing funds for personal purposes from a loan used for investment purposes. There is some case law on this and, as I said, you should ask your accountant for a definitive answer.
Mum
you need to have a think about why you want to do this. I can only see a reason for it if you were going to save a significant amount of money week to week, or if you need to move locations (ie closer to work or something), otherwise you will probably find you are no better off just because you call it an investment rather than your home (in fact if you sell it you could be worse off calling it an investment). Of course if you rent closer to work and save $100 per week after including rental losses and fueld costs then it may be worth looking at it.
As for deductibility of interest, as long as you are using the borrowed funds soley for the purpose of creating a taxable income, you can deduct the interest. If you convert your property to a rental property, you can deduct the interest paid on funds borrowed LESS any funds used for private use (if you drew down on the home loan 12 months ago to buy a car, you cannot deduct the interest on this component). The ATO doesnt care what the loan balance is when you decide to rent the property out, they trace the funds from the loan to see whether it was used for private use.
If you decide to do this, you will need to see an accountant to calculate the appropriate amounts to deduct and include as income in your return, but I think you will find you are no better off renting it out, and are probably better continuing to live in the property and pouring extra money into it when you can (if you put an extra $10,000 into the home loan per year you will save 7% or whatever your rate is. This is better than a 7% Term Deposit, as you are not paying any admin fees like you would in a Term Deposit).
Hope this helps.If you withdraw money to invest in an online account, you will be paying interest at around 7.3% but only getting say 6%, losing 1.3% straight away. But you would also be paying tax on any interest you make.
The ATO could also disallow the deduction of interest on the money borrowed to invest in this savings account because you will be losing money with no hope of a capital gain and therefore profit.
Terryw
Discover Home Loans
Parramatta
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Hi, Guys
After reading the opinions, I just wanted to clarify on redrawing extra repayments and taxation.
The redrawn extra repayments will not be treated by tax deductible, due to the fact that those extra repayment is considered your own private money (Your own earnings).
So, when Row moves out and declares her old home as an invetment property, ATO will then view the interest generated from the remainder of the loan in her old home as tax deductible?
Regards
Daniel Lee [specs]Hi Daniel
My understanding is that original the loan on the property will be deductible. The purpose of this loan was to buy the property. WHen the property becomes income producing, then this loan should be claimable.
But any increase used to buy consumer items or a new PPOR will not as it is not related to money making.
Terryw
Discover Home Loans
Parramatta
[email protected]
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Just send me a blank email, with “subscribe†in subject line.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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