Interest Deduction on Investment loan

I had a loan balance of $300k on an investment property but refinanced it for $333k and took out some money for personal use. Both loans P&I repayment. I understand that going forward I can only deduct 90% (300/333) of the interest costs against the investment. I deposited some money ($2k) into this loan account and also paid the monthly P&I instalments for the last 6-7 months. Currently the loan balance is $324k.

Now the question is what will be my interest deductibility in the below two scenarios:

If I refinance this loan again and the total loan amount is $288k, Will the deductible amount be 90% of $288k or can I deduct the whole interest on $288k?

If the loan amount after refinance is $360k, will the amount deductible be $291k? (90% of the current balance of $324k)

Thanks.

 

U need to refinance and split otherwise still need to apportion going forward

 

In the OP description it seems evident that over time the deductible % will remain fixed desipte the loan balance being paid down.Not true. Refinancing again will erode the 90% down further. It wont be $291K it would be 291/360 or 80.808333% so you lose just under 10% of the deductible !!

This is why loan splits are important. You should refinance to two loans - One being $291k and the other $69K. This will leave 100% of the $291K deductible and 0% of the $69K. Then make sure extra repayments are to the $69K split. eg Can you get IO on the $291K and P&I on the $69K ?

 

Thanks Paul, this is what i meant. The deductibility will only be $291k if the total loan amount increases to $360k. Yes you are right that the %age will be 80.80%.

What happens in the other scenario: If I refinance the current loan of ($324k with 90% deductibility) again and the total new loan amount is $288k, Will the deductible amount be 90% of $288k or can I deduct the whole interest on $288k?

 

I cant follow ? Where does 288k come from ?

 

Currently the loan balance of my loan is $324k and from this 90% ($291k) is tax deductible.

If I refinance this $324k loan and the new loan amount is $288k (decreased LVR on the property), how much will be thededcutible amount from $288k? can i deduct the whole amount of $288k or will the deductible amount be 90% of $288k?

 

Why would anyone refiinance to do that ? I think Terry and I just saw another issue that can be triggered by a blended loan. You can LOSE deductibility in dollar terms if you refinance down. If you have means to repay the existing loan there is NO WAY you should proceed. You should be splitting FIRST then repaying so 100% of the $288K is then deductible.

Otherwise, the deductible would be 90% still. ie $259K of that $288K loan.

 

Thansk a lot Paul. So if understand this correctly, below is what should be done:

I should split the current loan of $324k into two loans. Loan 1 $291,600 and loan 2 $32,400

Then pay down loan 2 to zero.

Then refinance the loan 1 (291,600) with another bank with the new loan balance of $288k (80% LVR of the property value of $360k).

By doing this the new loan of $288k will be fully deductible.

 

Yes. Of course these numbers must be re-run and confirmed at the time of the refinance / split