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Tax Tip 33: Deductibility of LMI

Discussion in 'Accounting & Tax' started by Terry_w, 30th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    LMI or Lenders Mortgage Insurance is deductible if the loan relates to an investment property purchase. It is deductible as a borrowing cost under s 25-25 ITAA97 http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.25.html


    This section allows borrowing costs to be deductible over 5 years or the life of the loan (where borrowing costs are less than $100 it can be claimed in the year incurred.)

    Where LMI is incurred mid way through a year only the portion relating to the time it was available for rent can be deducted. e.g If you settle on 01 June and immediately advertise for rent then you will be able to claim 20% of the premium x 30/365 because it was only 30 days left in the financial year. The LMI may therefore be claimed over 6 years as one year is split.

    Stamp duty is also payable on LMI as is GST and it would be the full premium charged that is deductible.

    Where LMI is borrowed, or added to the loan, the premium is still deductible even though not paid out of the pocket. This lessens the pain.

    e.g. $10,000 LMI would be deductible at $2,000 per year (assuming 1 july settlement). Someone the tip rate would benefit by approx 47% = $940 per year tax savings.

    but if the $10k was added to the loan or borrowed the extra interest incurred would be just $500 per year. The saving would be $440 per year for 5 years and then an ongoing $500 per year cost for the life of the loan after this time.

    Where LMI is charged on a loan increase there are complications and I will cover these next time. Also complications with one property owned by 2 people and the LMI incurred for a different property owned by one.

    This post was promted by https://propertychat.com.au/communi...ks-to-run-out-of-funds.3197/page-3#post-53760
     
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  2. AusMover

    AusMover Well-Known Member

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    Hi Terry,

    Where the initial PPOR is rented out after a few years and owner decides to make it IP, would the LMI claimable for deductions be proportionate to the time period when the property is an IP (i.e, rented)?

    OR the full LMI could be claimed even though property is/was IP for partial time period?

    Thanks
    Ausmover
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The 5 years would start from the time of settlement. So if you rent it out after 4 years you could only claim 1 year - against income. You could claim the rest against CGT when sold - if there is any tax to pay.
     
  4. AusMover

    AusMover Well-Known Member

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    Thanks Terry... very helpful.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Actually it won't be one year, but may be apportioned over 2 years because of date of purchase.
     
  6. Fitzy1903

    Fitzy1903 Well-Known Member

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    Will definitely be interested to hear about this when you get to this topic!
     
  7. mcarthur

    mcarthur Well-Known Member

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    Great information Terry, I wasn't aware of it at all. Thank you.

    I don't quite understand the above bit though.

    Say you have a loan for $500,000 + LMI (ie. it's capitalised in). LMI is $10,000.

    Is the interest to be repaid on the $10,000 LMI deductible, just like interest on the $500,000?

    Is the $10,000 itself also separately deductible (at the 20% pa)?

    Is your last part above - "but if the..." - talking instead about the case where the LMI is not capitalised into the loan, but rather is paid upfront and sourced from some other borrowed funds?
    ie. you buy for $500,000 and choose to pay the $10,000 LMI to the bank upfront from appropriately borrowed funds (e.g. LOC). ...and I'm not sure what happens next as regards the deductibility calcs o_O
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes LMI is deductible and yes the interest on LMI is deductible - assuming it relates to an investment property.

    Whether LMI is capitalised into the loan or not the interest on the loan will be deductible. If you borrow to pay LMI separately the interest on this loan will be deductible. If LMI is taken out of the loan you will have less loan funds at settlement so will have to come up with the shortfall - from cash (no no) or borrow - better.
     
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  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  10. SaberX

    SaberX Well-Known Member

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    Been along time since dealing with 25-25...

    When does the 5 years or life of loan begin where it is land followed by construction (construction loans). You'd then have say 6 months living in it to be a fhb and then once you begin renting it out can you begin your 5 years amortisation count down from then?

    Otherwise your first loan draw down at land settlement could result in the time until rental being 2 years by the time you construct.... Be good to clarify if the 5 years counts down during this time but is non deductible for tax purposes?
     
  11. SaberX

    SaberX Well-Known Member

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    Sorry read further up appears my hunch was correct and LMI upon renting out would be the remainder of 5 years still left, having commenced from settlement of house i.e. when borrowing costs incurred...

    Therefore tax benefit of lmi is less advantageous to those going down the construction path...
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you weren't going to live in it you could probably claim the LMI from the beginning based on Steele - see forthcoming tax tip. PaulG will probably disagree with me on this!
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Not really. Its a deferred cost. Paid now it will add to the costs of construction. And that reduces profit. The deduction benefit is merely deferred to a later tax period. Developers and construction works exactly that way. There is little to "deduct" until you have income.

    As Terry alluded in the prev post Steeles decision was about that concept. In that case the taxpayer argued successfully that INTEREST can be incurred now and paid now relating to a future committed intent to earn future rental income when the build is complete. The case was about the matching principles of basic tax law (ie deductions v's income). and the misplaced timing that may arise. However, Steele's principles have never been accepted by the ATO or argued by any taxpayer since (!) that it can apply to other costs other than interest.
     
  14. Totally_Smeng

    Totally_Smeng Member

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    Hi Terry, i'm still abit confused about this part hopefully you can clarify it for me. I purchased a property as PPOR and then turned it into an investment after 6 month. Am i still able to claim the $6xxx i paid as LMI for the remaining of the 5 year period? On another note, i am currently refinancing this loan to another financial institute which means i will need to purchase LMI again to maximise my borrowing as i'm purchasing my second property both at 88% LVR. Will this second lot of LMI on the first property be claimable once again over a 5 year period? I understand if the second property is purchased as an investment upfront i can claim the LMI cost over the 5 year period as well as an interest incurred if borrowed. Just would like to clarify how it would work with the first property i've purchased.
     
  15. SaberX

    SaberX Well-Known Member

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    Yeap, but with many portfolios being run to never sell out and avoid losing equity through stamp duty, selling/agent costs etc, it's unlikely that I"ll ever be able to use that deferred cost base amount of LMI to offset against profit. Therefore those running similar strategies of holding tight for the long run would only see an advantage in geetting LMI offset against income.

    Unfortunately Terry my idea would be 6 months for the FHB grant, so technically my intention is to live in it in terms of applying for FHB Grants, at which case this changes from month 7 onwards... so I think there may be a hard case to argue in claiming the LMI from the beginning as your 'first' intention is to live in it as a principle place of residence?

    Correct me if I'm wrong?

    @Paul - I probably wouldn't want to be the taxpayer to test the ATO either! :(
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You could claim 5 years less 6 months worth if rented for the full 4.5 years after living in it for 6 months.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See my tax tips on LMI. If the refinance was for the same amount then the full LMI may be deductible over 5 years if the property is rented. If you are borrowing more money then it would deppend.
     
  18. Totally_Smeng

    Totally_Smeng Member

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    Thanks Terry you've cleared up my understanding of LMI as an deduction for investment properties :D
     
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  19. FiurFiur

    FiurFiur New Member

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    Cool that you can both claim it as a borrowing expense and keep it as in interest cost! Great info thanks Terry.
     
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