Interest deduct-ability question

Hello all

I have a question with deducting interest on tax below.

Bob owns IP A. He gets it refinanced and able to draw an additional $90K. Jane is a guarantor of this loan.

Bob and Jane buys IP B. The 20% deposit for IP B was used from the $90K of Bob's IP A.

My question is, can Bob and Jane both claim interest deductions for the $90K as it was used for the purchase of IP B which both Bob and Jane owns? If not, why not?

What is the correct tax treatment that people think?

My tax accountant is saying Jane should not be able to claim any tax deduction from the cashout from IP A as she does not own it.

Is there a way around this?

Thank you all.

 

Find a better tax adviser. One who knows property tax better than that reply.

Since Bob and Jane own IP2 and the $90k was used to acquire IP2 the interest is deductible jointly against IP2. Not Ip1. The nature of all intrest deductions looks at the USE of the borrowing, not what is the loan security.

 

So if I am understanding this correctly, at the end of the day, it doesn't really matter who owns what, what matters is whether the funds used is to generate an income or not i.e. an IP.

If yes, the full interest can be deducted accordingly to the % share of the property. This is my thoughts too!

 

Yes as long as all the rules are met the interest on the $90k should be deductible to both

 

It does matter who owns what.

If Jane owned IP2 the interest would not be deductible unless Bob lent her under a written loan agreement

 

That makes sense. It doesn't sound right if Bob were just to lend money to Jane to buy an IP without Bob name on it and it being deductible to both.

So, does Bob need to have a written loan agreement to Jane for half of the $90K as both owns IP2 together and putting a deposit for it from Bob's IP1?

Or a written loan agreement is not necessary because Bob will also co-own IP2 with Jane?

I feel like a loan agreement for half of the $90k to Jane is still important but if it is not, I will like to skip it to reduce the hassle.

 

The ATO consider it not necessary I believe, for tax deductibility. But there may be other legal issues to consider.

 

oh boy. what other legal issues this may raise?

Jane being able to claim a share of Bob's IP1? I hope not!!

 

there are family law, estate planning and asset protection issues to consider on the legal side - and more

 

Yes many people forget or arent aware that debts arent marital property as such. Courts do sometimes conider debts as personal property (negative !)

eg If Bob and Mary are married and Bob lends $400K to Mary and they break up, Mary cant just think the debt isnt real or is divisible. Mary could get half the assets and be left with a $400K debt to her ex or the dilemma of how to refinance it. That could even become non-deductible through the magic of a court settlement order

Its a MAJOR reason why I wont advise couples on refinancing arrangements and some debt recycling. Its legal / credit advice with issues that could see me sued in years to come if I did give advice and not mention this trap. I see many people who wander down this path oblivious to the shift of debt to the spouse

Terry often mentions legal advice being given by lawyers and this is a further example. I often wonder how some brokers could be sued. But then if they just disregard something that they also know nothing about is that professional negligence ? Probably not. A trap for borrowers to seek independent legal advice when borrowing from their spouse and why such agreements need legal drafting and advice. Buying a loan agreement online could cost the value of the loan.

 

i guess issues will only arise if the relationship breakdown. that is where most of legal issues arises i guess.

 

Death and bankruptcy is where it also comes up too.

 

australia's law is so complex! wonder who comes up with these policies

 

The British!

 

USA law can be even more complex. They sortof look at British Law sometimes and state laws etc have impacts greater then here etc

 

Sorry to dig up an all thread but I'd just like to confirm the above points for my example.

• Fred owns IP A 100% outright
• Fred married Wilma
• Fred and Wilma want to buy a new property solely in Wilma's name due to land tax
• Fred and Wilma are refinancing other loans and want to pull equity out of IP A (owned 100% by Fred) to fund the deposit for IP B (to be owned 100% by Wilma). Both Fred and Wilma are on named on the borrowing.
• Fred and Wilma will fund remaining 80% via another lender and both names will be on the borrowing once again.
• Wilma would like to deduct 100% of the interest as the property is 100% in her name.

Question:
1) Does Fred still need to have a loan agreement in place if both parties are named on the equity release? IP A is used as security for borrowing but I am not sure if Fred is really lending money to Wilma....?

 

fred doesn't but he should have a written loan agreemnt.

 

For legal reason, not interest deductibility reasons (for Wilma)?

E.g. Wilma leaves Fred for postman and results in messy divorce?

 

There would be little difference in family law either way