Paid cash for investment property

Discussion in 'Accounting & Tax' started by sumterrence, 8th Feb, 2019.

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  1. sumterrence

    sumterrence Well-Known Member

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    Hi guys,

    Just wondering if I paid cash for an investment property first and than took out a loan afterwards due to tight settlement deadline.

    Can the interest from the loan still be tax deductible? Or do I need to apply for special ato ruling?

    Cheers,

    Terrence
     
    sumterrence, 8th Feb, 2019
    #1
  2. Paul@PAS

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

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    No. No need for a ruling. It wont be deductible.

    A short term funding deal may be costly in fees but could assist with the refinance being deductible !!
     
    Paul@PAS, 8th Feb, 2019
    #2
  3. The Y-man

    The Y-man Moderator Staff Member

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    Hi Paul,

    Assume would also depend on what the money after the property is mortgaged is used for? eg a loan taken out, money then being used for income producing investments?



    The Y-man
     
    The Y-man, 8th Feb, 2019
    #3
  4. Paul@PAS

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

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    The test for deductibility is generally tied to the use of the borrowed funds. If the property is already owned then the borrowing doesnt relate to the acquisition of the property. It just is a equity release. The test of deductibility then falls on what the funds are used for:

    Buying shares wont necessarily mean its deductible either. If shares are held for growth and dont pay a dividend for example. Too often people get it wrong or forget the "rules" and make a mess of the deductibility.

    There is a important matter called the refinancing principle that may offer a solution. But it would require a different form of ownership to be used.

    eg Unit Trust buys the property using cash it borrows from Terrence. Then that loan can be refinanced so a bank lender refinances that debt. Needs legal + tax advice and legal services to implement. Its a problem for a neg geared property but with some planning it may be averted.
     
    Paul@PAS, 8th Feb, 2019
    #4
  5. Terry_w

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

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    When you say cash do you mean money from a LOC or a relative etc?
     
    Terry_w, 8th Feb, 2019
    #5
  6. Paul@PAS

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

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    Was that a loan from a relative with a wink ;)
     
    Paul@PAS, 8th Feb, 2019
    #6