Tax Tip 79: Interest Deductibility for 1 on title 2 on loans

Discussion in 'Accounting & Tax' started by Terry_w, 7th Nov, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I don't think I have covered this before, but apologise if I have doubled up.

    In the situation of spouses banks will lend to both even though only one is on title. This includes both married and defacto spouses. I think all lenders allow this, but there may be a few exceptions.

    So where A owns the property and both A and B are on the loan who can claim the interest?
    Only A can as A is the owner of the property.

    Incidently this is generally not a good set up because
    1. The non owner is exposed to the loan and is liable for the whole debt, and
    2. The non owner has their serviceability significantly reduced because they will be liable for the whole debt and not have any of the rental income countered for serviceability.

    The only time this should be done is for serviceability reasons. Where the income of 1 is not enough both spouses can be used. Later perhaps the situation will change and the non owner spouse can come off the loan and then have their borrowing power increased.
     
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  2. L3ha7

    L3ha7 Well-Known Member

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    Thanks terry. Iur case is bit different but i got the gist.
     
  3. S0805

    S0805 Well-Known Member

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    Terry, what about capital gain liability...is it also against the spouse on title only?
    Also, what about estate protection, if non owner gets sued, is underlying property up for grabs?

    This is a bummer. when you go and release the further equity from the property, non owner spouse servicability will not help much further cause rental income and +/-gearing benefit will be considered for spouse on title only.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    As per usual - owner claims expenses and gets any income.

    Asset protection - if owner gets sued the property will be at risk. The non-owner will have to argue 50% is held on trust for them (see tips on resulting trusts and constructive trusts). Similar if a non-owner goes bankrupt - the trustee in bankruptcy will argue the that owner is trustee for the non-owner.

    Keep in mind that just because both may be on the loan now it doesn't always have to be that way. The non owner could come off if the owner can service.
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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  6. Grinners

    Grinners Member

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    Question:

    Mr. G and Mrs. G own a PPOR. They get a loan approved for 100k against the house. Both loan and house are in both their names.
    Mr. G exclusively uses the 100k to buy shares in his name.
    Is 100% of the interest deductible in his name due to him using the money for investment in his name, or does 50% of the interest need to be claimed in Mrs. G's name? (Which leads to the question of whether 50% of the shares need to be bought in her name to make her 50% deductible).

    Hypotheticallyc speaking!
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    See above!

    One on title 2 on loans...
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    see also PBR 1011299816055
     
  9. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    1. See prior posts regarding the deductibility issue
    2. Are shares held for CGT gains ? If so, may be $0 deductible Shares acquired MUST produce income or no deduction isallowed.
    3. Issue in 2. above can lead to a blended loan if some shares are bought to hold and others for income
    4. If income producing shares are sold then the loan MUST be repaid or deductible nexus may end. Again, can create a blended loan eg Sell the CBA shares and buy shares in a new float.

    and so on.

    Its common to find many mismanage their investment loans and create a mess.
     
  10. S0805

    S0805 Well-Known Member

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    Interesting topic indeed. I was doing some further reading on this and this is how I understand it....there are two types of common guarantor loans
    Income guarantee - between couples generally (i.e. spouse 1 goes on title and spouse 2 goes as income guarantor for serviceability point of view on loan)
    Security guarantee - parents or someone else helping out young generation....

    From lending point of view is it one easier to source than other, are lenders entertaining such structures especially income guarantee....

    I assume in income guarantee examples, land tax threshold will be calculated against the spouse 1 being on title is that correct?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Land tax is based on ownership and is not effected by loans or guarantees.

    Another poster has reported problems with the non owner spouse giving an income guarantee so the 3rd option is co-borrower
     
  12. S0805

    S0805 Well-Known Member

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    could you elaborate more. Is that an issue with bank not liking the structure or some tax issues.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    This thread is about 2 borrowers where one owns the property. guarantors being involved is a different topic and on another thread someone mentioned CBA wouldn't allow a guarantee from the spouse, but would allow them to be a borrower. I think it was in a thread that appeared yesterday or the day before.
     
  14. S0805

    S0805 Well-Known Member

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    no worries. I will search for keywords. Overall i see to achieve the one person on title and 2 on loan, isn't guarantor (through spouse income) is better option than co-borrower. with co-borrower tax man can always argue other spouse not on title is not receiving income so they will not be liable for any deduction while going as guarantor allows spouse 1 to appear on title as well as loan document....no need for co-borrower to have some loan agreement written to spouse 1 as well....
     
  15. martini

    martini Active Member

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    Hi Terryw
    I've read the tax tip, but have a clarifying question - I understand that Mr G can claim the interest deduction, not Mrs G. But does he claim 100% of the interest or can he only claim 50%? (leaving the other 50% not claimed).

    TIA
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I don't know any details about Mr and Mrs G

    But in the first post A could claim 100% of the income.
     
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  17. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I encountered a issue the other day where the title was in 1 name (Mr) and the ONLY way to get refinance of this property and another they both owned to buy a third in both names was if Mrs had at least a 1% interest in title. So Mr was forced into a CGT event and costs like duty and legals for the 1% sale to his spouse.

    Not all lenders have same policies. I have heard of other lenders with required minimums eg 10%, 25% before they allow co-borrowers. And some allow a spouse but not others. And some allow guarantors and others refuse to even discuss guarantors.. All instances where brokers can be very helpful
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    In this case it may have been better to stay and to cross collateralise.
    Do you know who the lender was?
     
  19. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Yes but was complicated by a lender who had been acquired by a bank who had a change of policy and wouldnt relend. The bank did lend but with crossed loans. Unavoidable.
     
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