Tax Tip 189: Moving out of the Main Residence – When can you claim Interest on loans?

There are 2 major issues when taxpayers want to claim the interest on a loan relating to a former main residence:

a) Redrawn amounts

b) Timing

Redrawn amounts and Mixed Loans
Interest is only deductible if the loan it is incurred on was used to purchase the property, or for improvements etc. Where any amounts have ever been redrawn from a loan the interest would need to be apportioned.


Example 1

Tyrell borrowed $500,000 to buy a main residence. Along the way she paid it down to $450,000 and then redrew $50,000 to buy a yacht (which is actually a small boat, but sounds better if he calls it a yatch).

This loan no longer relates solely to the property but is a mixed purpose loan so only 450/500 or 90% of any interest on the loan could be deductible once the property is available for rent.


Example 2

David used a LOC for his loan to purchase his main residence and borrowed $500,000 initially. Every week he deposited his salary and then redrew amounts to live on. The amount of the loan relating to the property will decrease each week and at the end of 5 years the loan would be extremely mixed.

He would have to spend hours to work out the portion of the loan relating to the property and might find that this might only be 10% of the loan amount.

(this is why you should never use a LOC as the main loan, but only to ‘access’ equity)



Timing
A person cannot start claiming interest until the property is available for rent. This is generally only after you have moved out and have advertised the property for rent at market rates. While you are living in the property and advertising it the property wouldn’t be available for rent, so you could not claim interest during this period.

There are also timing issues on when interest is incurred and debited to an account because interest is generally incurred daily but added monthly to the loan.


Example 3

Let’s say someone moves out on the 30th and immediately advertises the property for rent and on 1st of the following month they are charged $1,000 in interest. Can they claim that interest? No, well not in full because interest is charged in arrears and added to the account monthly. So, 29 days of that interest related to the period you would living in the property. So, in the first month only 1/30th of that $1,000 should be claimed.

 

Example 4
Bart decides to move back home and rent his main residence out. He moves out on the 1st of Feb, but he had advertised the property for rent from 15 Jan. He finds a tenant on 15 Feb.
Can he claim the interest from 15 Jan or 1 Feb or 15 Feb?

I think the answer is 1 Feb because although the property might have genuinely been available for rent from 15 Jan Bart was living in the property and it was therefore a private expense.

 

Hi Terry,
We (my wife and I) bought the unit (PPRO - our only property) with the loan $280k in 2011. We refinanced 3 times with topups of the loan till now. The purposes of topups included personal use, renovation, and shares investment. Our current loan balance is about $480k. We’ve moved out my unit and are living with elderly grandma, whom need us to look after. We plan to rent out my unit. It seems our loan is mixed now. I know we can only claim part of the interest of the loan $280k. How can I find out the portion of our loan for interest deductible? Many thanks!

 

For starters, How do you know this?

 

Just wanted to ask ,how often do people update their wills ?..

The last one 5 years ago is still folded flat stored in a safe with a 3 hour fire rating ..

 

From what I see as a lawyer - once, about 10 years after doing it.

You should review your will yearly at least and then update it if necessary.

 

Terry,thanks for your time to post that ..Top day in Brisbane..

 

I have been reading your Tips for a few years. That’s why I know a bit of deductible interest on loans for producing income. The hard part is how I know the remaining balance of the original loan $280k? Could you please shed my some light for this?

 

First you would need to work out the portions of the loan
Tax Tip 45: How to work out the Portions of a Mixed Loan Tax Tip 45: How to work out the Portions of a Mixed Loan

Does the $280k relate solely to the purchase of the house? If the loan was IO it might, but if PI it might have started at $280k but have reduced with repayments.

Prob best to work out the percentages the first time you refinanced and then use excel to work out the rest.

 

Hi Rolf,
We had an offset account linked to the loan all the time. Our salaries are deposited into the offset account. I have not talked to our current lender-CBA yet. Do l need to call CBA to tell them about renting out our unit? Many thanks!

 

You cannot just ssume its $280K x rate and claim that. A blended loan calculation needs to look at all new loans and all repaymnets. Since day one.
In many cases the ATO identify the issue and its entirely up to the taxpayer to satisfy the ATO on the deductible %. If they cant the ATO is allowed to just cancel all the interest deduction and allow you to object and appeal. The ATO dont have to defend that position. Its the taxpayers job to maintain suitable records and information.

Ever tried to drink the plain milk part of a strawberry milkshake ?

 

Thank you for the reply. It seems that I need to dig out all the bank statements and calculate the remaining balance of the original loan $280k.

 

You will

 

I had a recent client audit by the ATO. They traced the loan through two refinances. Back in 2015 there was a $400 amount drawn for a non-property related payment. The ATO accepted that the loan had a blended purpose and then allowed XX.XX% of the interest etc thereafter based on the priortions on the date the $400 was paid . A trival adjustment but they do consider it.

 

Mixed loan as others have mentioned but look further into the renovations ‘top up’ you mention as well.
If (as appears) it was for the property you are now renting out, that portion as well as the $280k initial ‘could’ be deductible.
Check that out first before doing all the mixed loans calcs to determine deductible interest portion.

 

Yes, the whole $280k was for the purchase of the unit. I didn't redraw from the loan. And I didn't prepay extra payment to the loan accounts. I am ringing Westpac to ask for all 4 loans statements (total 86 statements) to calculate the remaining loan balance. Thank you for the help!