Tax Tip 335: Spouses Jointly Borrowing and Deductibility of Interest

Sometimes spouses jointly borrow but the asset they borrow for is held in the name of one of them rather than both.

In these cases it is the owner of the asset that determines who will deduct the interest – the title holder.

People seem to get confused when they hear ‘title holder’ as they think property title. But the title hold here refers to the title to the new asset borrowed for, not the security for the loan.


Example

Homer and Marge have a joint home loan secured on their main residence. They split it and do a bit of debt recycling by paying down the split and redrawing to buy shares in the name of Marge.


In this case the borrowings were used by Marge to buy shares that are expected to pay dividends. Marge is the title holder and she is the one that will be able to claim the interest on that loan split, even if the loan is in both her name and Homer’s name.

 

Thanks Terry, I was just going to ask the same question..

If i change it to below scenario, will it be the same?

Homer and Marge have a joint home loan secured on an investment property.
Investment property is solely under Homer's name.
They did a cash out /or separate split and use the cash to buy shares in the name of Marge.

 

If Marge is already a borrower then it should be ok. If he wasn't then a written loan agreement would be needed so Homer could borrow and onlend to Marge.

 

Sorry just to clarify.

you mean if Marge already a borrower in respect to the investment property correct?

 

If Marge was on the joint loan as a borrower she could just use the borrowed money and claim the interest.
But all the normal rules of deductibility apply - re mixing etc.