Deductiblity of interest on a loan to aquire sposes' share of IP

Query - Is the interest deductible on a loan to buy-out your sposes' share in a property?

Situation:
1 - My spose and I jointly own our PPOR (Property #1) with no mortgage.
2 - I take out a loan to acquire my sposes' 50% interest in Property #1 (I execute the required legal contract, pay the required stamp duty)
3 - My wife uses the funds to buy a new PPOR (Property #2)
4 - We move out of Property #1 into Property #2
5 - As sole owner, I lease Property #1 - thereby making it an IP

Query - Is the interest on the loan used to acquire the 50% interest in Property #1 (now an IP) tax deductible?

 

Theoretically yes but I dont think the taxman likes that one.He would say that the transaction is not an arms length transaction and consequently would rule against that one.

 

Yes - if done correctly.

I have written about this a lot on these forums.

 

Why wouldn't it be an arm's length transaction?

 

What you are proposing can work.

The devil is in the detail and implementing the strategy is much harder than creating the strategy.

 

I have seen people who have done it where none of the interest was deductible because they buggered up the transaction.

if your home in in NSW you might consider a transfer fixed unit trust. I advised a client on this and got favourable private rulings from the ATO and OSR saying interest was deductible to the individuals in full, Part IV wouldn't be applied and the land tax threshold was available. Clients borrowed $1mil and bought a new home for $1mil but all the interest was claimable.

 

ATO private rulings say as long as done correctly the interest is deductible so not sure why you say they dont like it.

 

There is even an old ATO ID floating around where they said it was ok.

 

What steps did u take as part of this step is critical. It sounds like you involved conveyancer so that's good and paid stamp duty. did you paid off the existing loan account (at least your spouse's part) and substitute that with your new loan. I hope its at the market value as well.

I just find it amazing people make this bigger decision without consulting their accountant. Not suggesting you did....I hope you did....

 

Yes or they say ohh its ok in victoria no stamp duty for transfers between spouses. Yes. And if done that way its a gift at zero consideration

So why is the funds lent to give a gift deductible ?

Simple it isnt.

 

Rules in Victoria changed recently - used to be stamp duty on transfer of PPOR between spouses.

Now only if results in 50/50 (I think- check first)

 

Other way around.

Any transfer between used to be duty free - even on investment properties.
Now, only for the main residence AND only if it ends up TIC in equal shares or JT AND only if for no consideration.