Tax Tip 467: Joint Loans, investment in one name – is an onlending agreement needed to claim interes

It is common for both spouses to be on a loan but one of them only be the owner of the investment that was purchased with the borrowed money.


In situations like this only the owner of the investment is the one that is able to claim the interest. But can they claim 100% of the interest if they are one of 2 borrowers or should they be claiming just 50%?


If just 50% would they need a written contract with the other spouse lending them their share of the borrowed money?


Example

Homer owns the main residence. He bought it before meeting Marge.

Homer and Marge want to buy an investment property, they want to get it in Marge’s name so they can save tax, but Marge has no income at all and won’t qualify for a loan.

So, they both apply as borrowers for the loan but Marge will be the sole owner of the property.


Homer cannot claim any interest as he has not borrowed to produce any income, as required under s8-1 ITAA97.

Marge has borrowed to produce income (in the form of rent), but Homer is a joint borrower so can Marge claim 100% of the interest on the loan or just 50%?


Example 2

A few years later Marge’s property has tripled in value and both Homer and Marge borrow against it and the funds are used by Homer to buy shares.

Can Homer claim 50% or 100% of the interest in this case?


In situations like these the appropriate tax treatment is the owner of the asset purchased with the borrowed money to claim 100% of the interest that relates to the loan that was used to buy that asset, if it is income producing.


They are joint borrowers, but with 2 people borrowing like this under one loan they are each jointly and severally liable for the debt. Marge is liable for 100% of the debt on the loan used to buy her investment property, as is Homer. If they default the lender could come after one of them and not the other and that person would be liable for 100% of the debt, not just their ‘share’ of the debt.


I don’t think it would be necessary for the spouses to enter into an onlending agreement if they are both borrowers and only one is using the money to invest. Keep in mind that I am a solicitor that draws up loan agreements so I would be making more money if it was necessary.

 

Can they both claim the interest in the end?

 

The deduction for interest where spouses are both borrowers is generally based on who OWNS the legal interest to the investment. The co-borrower cant claim a cent if they have no legal interest. Tax law is framed so deductions can only be claimed against income that is produced. No income = no deduction usually. But the spouse who does own the property can claim 100% of the laon interest.

Non-spouses or a entity etc should never attempt this without legal / tax advice. That is where the onlending agreement may be recommended
This also applies to a JV partnership. There can be some legal concepts with partnerships that change matters. Partnerships as a structure (its not but lets agree it is for this purpose) cannot buy and own assets. Only Partners in the partnership can. This can affect loans and interest