Our PROP will become a rental in the next 3 months. In order to bring it up to rental standards we need to do some work on it – new desk/staircase, hot water system, fence, painting etc. We have converted our loan to LOC in anticipation of the property becoming a rental. I assume it is okay to build up the LOC loan amount ($60K currently excluding the work mentioned above) in order for us to claim the interest once it becomes a rental.
I would think it would be better to use LOC finance for the above in order to free our cash up for any work that is required on what will become our PPOR.How would the ATO view this if we build up the LOC loan to from $60K to say $90K? Would it be a issue or does the "clock start ticking" as far as they are concerned from the day it becomes a rental. I also understand once it is a rental we can add council rates, land tax etc to the LOC in order to build the level of "good" debt and free our cash for the PPOR. Any comments? Thanks in advance.
converting to a LOC is very dangerous. I would suggest you never start putting wages etc in and taking them out. It may work out ok if you are just capitalising the interest, I would have done it part IO with offset and part LOC.
It is a good idea to start borrowing for the property as you plan but run it by your tax advisor 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
"How would the ATO view this if we build up the LOC loan to from $60K to say $90K? Would it be a issue or does the "clock start ticking" as far as they are concerned from the day it becomes a rental"
A LOC is not much different to a credit limit on a credit card, interest is only applicable to the amount you have spent
This link should be helpful as far as what you can claim goes…
http://www.ato.gov.au/individuals/content.asp?doc=/content/00183233.htm
Can you claim the cost of repairs you make before you rent out the property?
You cannot claim the cost of repairing defects, damage or deterioration that existed when you obtained the property, even if you carried out these repairs to make the property suitable for renting. This is because these expenses relate to the period before the property became an income producing property.
Example
Stephen needed to do some repairs to a rental property he recently purchased before the first tenants moved in. He paid tradespeople to repaint dirty walls, replace broken light fittings and repair doors on two bedrooms. He also had to have the house treated for damage by white ants.
Because Stephen incurred these expenses to make the property suitable for rental, not while he was using the property to generate rental income, the expenses are capital expenses. This means he cannot claim a deduction for them
……………………………………..
Cheers, Jan
You could use the LOC for improvements to the property and the interest should be deductible once the house is rented out.
Jan raises an interesting point about repairs, but I would think that the repairs itself may not be claimable but any interest on loans taken out to do the repairs would be deductible once the property is rented out. This is because the loan relates to expenses of the property.
But check this with an accountant please as I may be wrong.
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
You must be logged in to reply to this topic. If you don't have an account, you can register here.
