Tax Tip 341: Deductibility of Interest When Adding a Spouse to Title of a Property

Discussion in 'Accounting & Tax' started by Terry_w, 26th Feb, 2021.

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  1. Terry_w

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

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    It is not as simple as just adding a name to a property when transferring between family members. For the interest on the loan to be deductible each party’s share of the property would need to have been purchased with borrowed money. This applies to spousal transfers and to any part transfer of a property.


    Example

    Homer owns an IP and in QLD he is paying more land tax than if they property was jointly owned, so he adds his wife Marge to the title. This helps avoid land tax, but what happens to the interest on the loan?

    If it was a sale of 50% and Marge borrowed to buy his share she could claim the interest.

    If the name of Marge was simply added to the title, no interest would be deductible because she didn’t borrow to acquire the property.

    To make things worse, only 50% of Homer’s original loan woud now be deductible


    Example 2

    Homers property is worth $1,000,000 and the loan is $600,000

    Marge is added to the loan and title, as a 50% owner, but the transfer is for no consideration.

    Homer has disposed of 50% of the property. So only half of his original loan could be deductible.

    Marge didn’t borrow to acquire the 50% from Homer, it was a gift. So Marge would not be able to claim any of the interest on the loan.

    Net result is a $600,000 loan with 50% of the interest deductible.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    And a transfer for love & affection and without consideration or for nominal consideration is also fatal. If Marge buys 50% of the home at Springfield Terrace and her share has a consideration of $0 or $1 or even $10,000 you cant borrow money to not pay consideration. For deductibility you must boorow money and use the borrowed money to acquire that interest. Of course a further compliaction is that the market value substitution rule for CGT purpsoes ONLY will consider Homer disposed of 50% of the market value and that Marge has acquired at that same value.

    Generally speaking a related party tarnsfer is often best conducted at market valuem, with a standard contract and with refinancing involved.

    This is a good example of where the substance over form of a borrowing can fail. If a loan is not advanced and then used to acquire a property it lacks deductibility.

    Tip - Seek legal & tax advice prior to any change of % of title