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Tax Tip 11: Further Borrowing against property deductible against the

Discussion in 'Accounting & Tax' started by Terry_w, 7th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Further Borrowing against property will be deductible against the income it generates


    I often come across people who say things like “My property is slightly positive geared, i don’t want to borrow against it any further as it will cause the property to be negative geared.”

    This is not correct because it is the purpose and use of the borrowed money that determines deductibility. The security for the loan doesn’t matter.


    So if I owned 123 Smith Street and had a 50% LVR and increased my loan to 90%, to buy 456 Jones Street, this won’t affect the cash flow for 123 Smith Street because the extra money will be deductible against the new property at 456 Jones Street which I used the money for.


    On tax returns the interest has to be claimed against the correct property.


    It is also important to split the loans because when the property that it relates to is no longer income producing the interest will no longer be deductible.
     
    Perthguy likes this.
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
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    9,030
    Location:
    Sydney
    Another example

    Imagine Tom has a $500,000 loan used to purchase property A. Property A has increased in value and the loan is increased to $600,000 with the extra $100,000 used for the purchase of property B. Both A and B are investment properties.


    It is important to realise that the interest on the $100,000 loan is deductible against property B not A. If Tom had one big loan, which he shouldn’t if he has been following my tax tips, then he would have to apportion the interest.


    You may wonder what the point is because it will all be the same in the end, and this may be the case but

    • there would be a different tax situation if the owners of A and B were not 100% the same. e.g. a spouse’s involvement

    • Sale of one house could mean interest being claimed on the other one would suddenly increase when you realise you can keep claiming interest on the correct property (assuming the problem of the security for the loans is solved) and this could trigger an audit.

    • CGT issues if the interest is not claimed against income.
     
    EN710 likes this.