Borrower Different to Owner Tax Deduction Implications

Hi all.

I have a few questions relating to the borrowing of funds, single/joint names on a title and the associated deductibility of interest expenses, rental income and rental expenses.

I understand that person A and person B can be joint borrowers on an IP loan with only one of their names on the title (whereby the name on the title is entitled to all interest deductions, income and deductible expenses from renting out the IP).

However, what if I wanted to take out a cash out equity loan against my IP and purchase an IP for my son (so I will be the borrower but the title is in my son’s name)?

In this case how are the interest deductions, income and expenses from renting out the IP allocated?

I assume that the income and expenses related to the IP will be allocated to my son as his name is on the title but will I be entitled to claim a tax deduction for the interest expenses on the loan?

If not, then what if I used the cash out equity loan to purchase an IP but as tenants in common on the title whereby I owned say 30% and my son owned 70%?

Would I be entitled to claim the interest expenses as a tax deduction or only 30% of the interest expenses and 30% of the rental income and expenses?

Finally how is the land tax threshold in NSW apportioned when an IP is owned as tenants in common? Is 30% of the land value of the IP apportioned to me and 70% to my son in the above example?

Thanks.

 

Your borrowings wouldn't be deductible if you incurred interest but no income received. Your son couldn't claim any interest either as he has no incurred any.

You would need to enter into a arms length written loan agreement with your son.

If you were joint owners at 30%/70% you could only claim your share.

Get some legal advice.

 

The above responses are based on the notion that USE of the borrowed money is what determines its deductibility.

s8-1 contains the general rule for tax deductibility
(1) You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income

You wont have assessable income from rent as you have no legal interest in the property or dont receive interest income from a loan.

However if you own 30% of the property and your borrowing against your investment property is NOT MORE than 30% of the cost then you may have a diirect borrowing attributable to your share of the dwelling. If your son pays you the equivalent of 70% of market rent its possible that the property may also be land tax exempt as a principle place of residence of ONE of the owners (son). You would be assessed on the 70% of income and allowed a deduction for your direct borrowing interest. If he paid less than the 70% rent you would lose a portion of deductibility. If any borrowings are jointly incurred then a portion of this may NOT be deductible if it relates to your sons portion. You may also have a 30% deduction for things like rates etc despite your son paying the rates for example.

Your sons share of his property would also access the main residence exemption for CGT where you would not. However in cases like this it is possible you can include 3rd element CGT costs which should not be ignored. This may reduce your future CGT position. This likley needs advice as some, not all, costs may be considered and need to be recorded and evidence retained.

 

So just to clarify, assuming I borrowed $100k to buy a 30% share of the IP, then I can only claim as a deduction the interest expense related to $30k of the loan? If so then $70k of the loan would be wasted in terms of being unable to claim a tax deduction. Will have to think this through.

My son would not live in the IP and it would be rented out instead so would he be able to claim the land tax threshold in NSW for his 70% and I claim the land tax threshold for my 30%??

 

Why cant your son afford to buy the entire IP? Or a cheaper IP?