Tax deductability on loan

Discussion in 'Accounting & Tax' started by VanillaSlice, 13th Nov, 2019.

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  1. VanillaSlice

    VanillaSlice Well-Known Member

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    Hello Tax experts,

    Say if a person wants to build a home on an unencumbered block of land but is in the process of sourcing a loan for the build and getting finance approved which could potentially take a while.

    If they proceed with the build and pay cash to the builder for each instalment during the build process, then at final installment stage have the lender pay the builder the full build amount and the builder refund the purchaser the build portion which previously paid.

    Since this home is built for investment purpose would the interest on the loan be tax deductible ?

    (The installments paid in cash to the builder while sorting out finance will be refunded by the builder to the purchaser in this case once loan is drawn down and paid again to the builder.)

    Thanks very much :)
     
  2. thatbum

    thatbum Well-Known Member

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    ...why?
     
  3. Terry_w

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

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    No
     
  4. VanillaSlice

    VanillaSlice Well-Known Member

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    What is the question please ?
     
  5. VanillaSlice

    VanillaSlice Well-Known Member

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    May I ask why not ? The loan is for investment purpose as the home is built to be rented out.
     
  6. Terry_w

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

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    The loan doesn't relate to an investment - you have already paid.

    see
    Tax Tip 5: Reimbursing yourself - Impossible Tax Tip 5: Reimbursing yourself - Impossible
     
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  7. thatbum

    thatbum Well-Known Member

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    Why would you even want to do this? And doesn't it involve lying to the bank?
     
  8. Archaon

    Archaon Well-Known Member

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    why isn't a construction loan being sought?
     
  9. VanillaSlice

    VanillaSlice Well-Known Member

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    There's no lying involved either to the bank or anyone. I need to take my time sorting out my finances and also to find the most suitable lender and this takes time. In the mean time I would like to start building and in order to proceed the builder requires payment when installments are due and am Ok with paying using my own funds. However since this home is for investment purpose I would like to leverage and claim deduction on the interest charged on the loan when this is eligable ie when the tenant moves in. The issue is the timing of the loan draw down which may happen a few months after construction has commenced and inital installments are already paid using own funds. I would like to know if this may impact the loan's future eligability to claim deduction on the loan interest.
     
    Last edited: 13th Nov, 2019
  10. VanillaSlice

    VanillaSlice Well-Known Member

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    currently in progress.... but may take a while as I need to take my time to find the right lender.

    I am just exploring the option of proceeding with the build now using own funds then later on have the full loan drawn down when it is sorted. Then have the initall installments already paid (using own funds) refunded by the builder if possible.
     
  11. VanillaSlice

    VanillaSlice Well-Known Member

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    Thanks Terry, so for construction loan, is the interest charged during the construction process tax deductable or is it only AFTER the tenants move in that it becomes tax deductable ?
     
  12. VanillaSlice

    VanillaSlice Well-Known Member

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    Hi Terry, I am not reimbursing myself with the "loan money" .... the bank is paying the builder the full build amount...while the builder refunds me the installments that I have already paid him when they were due during the buid process....
    Contruction installments occur in multiple stages....it's just that I won't be able to get my loan sorted until a few months time and I would like to commence the construction now hence builder requires down payment in order to proceed.

    The moment the loan gets drawn down it stays with the builder and I won't get to touch the funds. The builder is just refunding me what I previously paid for in order to proceed with the build without having construction finance in place yet.

    Hope this makes sense.
    Thanks
     
  13. Terry_w

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

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    Yes. But only if you borrow to construct, not to reimburse yourself
     
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  14. Terry_w

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

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    Sounds like a reimbursement to me.
    Part Iva would deny a deduction in any case
     
  15. Terry_w

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

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    Also lenders generally won't lend if construction started already
     
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  16. Archaon

    Archaon Well-Known Member

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    What's the "Right lender"?

    Can't you just borrow to construct, then refinance away after completion?
     
  17. VanillaSlice

    VanillaSlice Well-Known Member

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    I am exploring different possible options available.
     
  18. Morgs

    Morgs Well-Known Member Business Member

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    I think this will actually be your biggest challenge
     
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  19. VanillaSlice

    VanillaSlice Well-Known Member

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    Sorry yes to which one ?
    -Interest on a construction loan is tax deductable during construction phase OR
    -Interest on a construction loan is tax deductable after the tenants have moved in ?
    or both ?
     
  20. VanillaSlice

    VanillaSlice Well-Known Member

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    I see, thanks for letting me know. Because rates on construction loans are quite high hence I wanted to take my time to find a lender that fits best whilst commencing construction using own funds. Just an option I was contemplating and wanted to explore.
     

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