Capitalising Refinance Costs

Hi gabsman,

An accountant can probably confirm, but this is my take on it.

The purpose of the loan determines it tax deductibilty. With this extra $3,000, $700 of it is allocated for admin and legal cost costs, which since it is an IP can be proven it is for investment purposes, so the interest on this portion is tax deductible.

However the extra $2,300 is extra cash that isn't being used for investment purposes, its being put into a bank account with other personal funds meaning non deductibility on that part of the loan.

Terry, with your comment above, are you saying that because some of the loan is lets say tainted for want of a better word, then the complete loan would be non-deductible?

I thought that even though it was a mixed purpose loan with no sub accounts, it was as simple as working out the percentage of investment to non-investment and working with that?

Thanks Terry, basically as I thought. You can't clam that you are paying off the non-deductible portion of the loan first, has to be done in proportion.

Derek

Things must have changed in the West because in the rest of the Country some of the information we see clients provided with by their Bank or Banker still leave a lot to be desired.

Classic case this morning on a SMSF deal here in Qld where the Bank told the client to sign the purchase contract with 3 names as he yet formed the Security Trustee Company:

1) Personal Names

2) SMSF Name

3) And or Nominee.

Unfortunately non of these are correct and insertion of any of these names would incurred double Stamp Duty in Qld which would cost the client around $18,000. Thankfully we are doing the doing the deal thru another lender although the initial Bank cant see what all the fuss is about.

Simple story don't take Tax or Legal advice from anyone who is not licensed to give it.

Cheers

Yours in Finance

As a slight variation to the above, I refinanced and ended up with approx $14k undrawn in the new IO loan. Each month the interest is reducing the $14k available ie I'm not putting money in to paying off the loan, but it's coming out of the amount undrawn. So if I'm capitalising the interest, I take it I can't claim tax deductions on the interest while I'm not paying anything into the loan. But once I start paying the loan again, I can start claiming tax deductions? Not sure if it makes a difference but currently there is an offset attached to this loan where all my savings is currently sitting.

Backstory is I bought IP1 about 12months prior to refinancing. When I refinanced to get a better rate, the better rate was only for borrowings of at least 200k. So the lender at the time put down 186k to pay off the old loan and 14k for "renovations". I set up an offset to attach to the loan to reduce interest payable. Currently I have no other debt (living with parents). At the moment I am buying IP2 and the money I have in my offset is providing the deposit. So to free up cash I just let the interest of IP1 eat up the 14k. Though by capitalising the interest, I'm not sure whether I'm digging myself a hole because I would be creating interest of interest?

Which ruling is this? Do you have a link to it by any chance? My only what if scenario, is if I decide to move into IP2 at some stage and make it a PPOR. Then technically the interest on interest I created at some point helped fund a PPOR which makes it non deductible.