Interest deductibility - Mortgage Insurance and Stamp Duty

Discussion in 'Accounting & Tax' started by AlexV_Sydney, 12th Mar, 2017.

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  1. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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    Hi,

    please advise whether interest is deductible against Stamp Duty and Mortgage Insurance?

    Example:
    I have PPOR with 500K owner-occupied loan and 100K cash on attached offset account. The property value has been increased so I can refinance to add an investment loan 200K to buy IP.

    I'm going to buy IP (with produced income) and use that 200K to pay for the deposit, stamp duty (NSW) and mortgage insurance.

    1) Will interest be deductible only on deposit portion,or on stamp duty and mortgage insurance as well?
    2) Would it be better strategy if I first decrease the home loan balance from 500K to 400K (pay from offset account to loan account) to make an investment loan 300K (200K + 100K)? (as long as don't plan to use my PPOR as an investment in the future)

    Thanks in advance!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have written extensive tax tips on these questions. see the tax forum

    Best to pay down non-deductible debt and reborrow to invest. make sure you split the loan.

    Whether LMI is deductible or not will depend on a few thing. i don't think it would be deductible in full if incurred on the owner occupied property loan because part of it relates to an owner occupied loan. So it may be better to incur the LMI on the investment property's loan.
     
  3. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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    Thanks, Terry! Yes, I spent many days reading your helpful tips (I very appreciate it), but I could not find anything about interest related to the payment for LMI and Stamp Duty. So if I pay them from Investment Loan account (secured by PPOR), will the interest be fully deductible? (I did not plan to pay for LMI and Stamp Duty from Offset Account attached to OO Loan)

    The second question was just to confirm I understood your tips correctly :)
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There are 3 tips in a row on lmi. I am out so don't remember the numbers but the last of these tips covers the lmi issue.

    .If the lmi is deductible then any borrowings used to pay the lmi can be deductible.

    Stamp duty is a capital expense so not deductible but if the duty relates to a property rented out then any loan used to pay the duty can be deductible.
     
  5. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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    Thanks again, Terry! I'll read more about your LMI tips.
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    1. LMI and borrowing expenses are deductible to the extent the USE of the newly borrowed funds is USED to produce income. Unused funds in a offset is a example of a portion of borrowing expenses that may not yet have a deductible purpose.
    2. Borrowing costs are deductible over 60months against the property that it acquire or refinances.
    3. New loans on existing property should be split so that the new purpose and old purpose are not blended.
    4. Where a new loan refinances an old loan the former loan balance would be said to be refinanced. Any new sum may or may not have a deductible purpose and the USE of those funds requires review. The loan security is not the issue.
    5. If the old loan had deferred borrowing expenses then this may trigger the remaining deductions for borrowing expenses on the old loan. to be deductible
    6. If there was a breakcost for the old loan this may be deductible

    If any of the above are unclear seek personal tax advice to avoid error or underclaiming deductions
     
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  7. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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    Thanks, Paul!

    One more question:
    my broker said, for deductibility it does not matter what kind of loan (Investment Loan or Owner-Occupied Loan) is created when I split my existing PPOR OO Loan. So he advises to have OO Loan for investment purpose to have better interest rate.

    Is that true? (As far as I understood, in Terry's tips it's stated the loan is investment loan). If not, are there any proof links? (I'm really confused)
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Your broker should not be giving tax advise but this is correct.
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes. It doesnt matter what the loan is called it how it is used. I have only ONCE seen a actual client tax query with a loan type. He borrowed an investment loan and didnt report any property income etc. He used to proceeds to buy a boat or something similiar. ATO queried absence of investment income....He never claimed a deduction so no issue. I recall thinking ATO would get a lot of these outcomes.
     
    AlexV_Sydney likes this.

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