I am currently building my first IP (due to complete by Sept) partly financed using equity loan on my PPOR. I am now considering relocating (sell my home and purchase a new home in another suburb). That means I would need to settle the equity loan once I sold my PPOR and then get a new home loan and equity loan to purchase my new home. Would I lose the tax benefit on the equity loan? Would it be possible to transfer the equity loan to the new home without losing tax benefit?
Any help with this question would be very much appreciated.
No, if you close out the loan on the ip then the new loan is for personal use & not deductible.
To sell the house you would need to pay back any loans which are secured by that house. So you would probably have to pay back the equity loan too. That would not be good as you would have less cash for the new house.
If the IP house has increased in value then you may be able to transfer the security of the loan to that house. Or
You may be able to find a new house to purchase and settle on the same day and just switch the security = not easy to arrange.Or
You may be able to temporarily keep an amount of money, proceeds from the sale, in a term deposit equal to the balance on the LOC and have this used as security. On settlement of the new house then the money can be released.
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 all who reply.
Seh
I was in a similar situation. I had taken out an equity loan on one property for the intention of using it for personal reasons (eg. buy car, furniture etc). After a while I decided to use it as a deposit on another property.
I was not able to claim any of the interest on the equity loan, regardless if I sold the first property (which I eventually did) or not.
I'm pretty sure that it is the original purpose of the loan determines if it's tax deductible. If you took out the equity loan and told the lender it would be used for investment, you should be fine.
Darren.
No, original purpose doesn't matter.
If you set up a LOC and tell the bank the money was to be used for a heart transplant for your nanna and then you just went out and bought shares using the LOC (and left poor nanna to fend for herself) then the interest would be deductible.
It is the purpose the borrowed money is used for that matters in this case. This is known as the "use test" and was first outlined in the case of FC of T v Munro (1926) 38 CLR 153.
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
Hey Terry, you could be right as I'm not an expert in the area of taxation law. However, my accountant advised me this was the case and I have also seen this situation being discussed many times on sky news business channel who say the same (eg. Margaret Lomas and crew).
Maybe I've misinterpreted what they've said.
Can you provide a reference to clarify this? I've done some googling but can't find anything relevant.
Yes, you should always ask for an authority to back up a claim
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/pdf/pbr/tr2000-002.pdf
Cases
FC of T v Munro (1926) 38 CLR 153
Steele v. DC of T 99 ATC 4242; 41 ATR 139
Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613
Kidston Goldmines Ltd v. FC of T 91 ATC 4538 at 4545-6; (1991) 22 ATR 168Terryw | 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
Cheers. Looks like I've either been misinformed or been misinterpreting what's been said about this. Thanks for clarifying Terry.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
