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Tax Tip 80: Deductibility of Interest for 2 Unequal Owners

Discussion in 'Accounting & Tax' started by Terry_w, 9th Nov, 2015.

  1. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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    Tax Tip 80: Deductibility of Interest for 2 Unequal Owners

    Say A and B own a property as Tenants in Common with 99/1 shares. In this situation they must claim all expenses, including interest, in the same percentages as their ownership.
     
  2. datto

    datto Well-Known Member

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    Now what if A divorces B and moves in with C in a civil union. A pays out B the one percent.

    B's name is scrubbed off the title and A now owns 100%.

    A should be entitled to now claim ALL the interest and other deductions.
     
  3. D.T.

    D.T. Specialist Property Manager Business Member

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    No, paying someone out is not a deductible expense
     
  4. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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  5. datto

    datto Well-Known Member

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    Ah, just as I thought, there are tax tips covering divorce. No stone has been left unturned.
     
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  6. A family court property order satisfies a CGT rule which effectively treats A as always having owned the portion of title formerly held by B. And exchange of cash etc isnt a deductible etc. Its all a CGT issue without a CGT trigger event. State laws generally also don't impose duty either. Of course any existing loans needs to be refinanced etc. This is all part of the advice given by solicitors in a marital breakdown.

    Important that DIY divorces are correctly completed through the family court to avoid a CGT problem later !!
     
  7. Craig John

    Craig John Member

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    I just came across a statement on the ATO site which seems to suggest that the deductibility of interest does not have to be in the same percentage as their ownership.

    "Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all the co-owners"

    Ref: Rental properties 2013-14

    Am interpreting this correctly?
     
  8. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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    Yes.

    An example is where A and B buy a property together, but A borrows and B pays cash for their share.
     
  9. There are two cases where this may apply.
    1. Where each owner separately finances their respective interests. This does not generally apply to spouses !! There are some technical tax law issues surrounding this issue and without tax or legal advice taxpayers who are married should not attempt such a scheme. Particularly note the example of ONE borrows and one does not.
    2. A property rental business. This requires EXTENSIVE rental income and operations. In that case all the TIC and other interest are ignored and Dave and Mable may be seen as each having a 50% share in partnership regardless of title.
     
  10. The ATO data matching for this issue is very solid. In the few instances I have claimed on this basis the ATO do follow up around a year later. Its more common say if two friends buy a IP or two sisters etc....So lets assume two couples buy a property. One couple may borrow 100% of their 50% interest and the other uses 50% cash and 50% borrowed....That can work too. BUT its not recommended to just enter in personal tax returns.
     
  11. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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    I have some loan clients who have done this. They are spouses and they have split the loan into their respective ownership portions - unequal. They also have 2 offset accounts, each using one exclusively.

    They were set up like this when they come to me for a loan. It was advised by their accountant as being acceptable.
     
  12. Crank IT Komo

    Crank IT Komo New Member

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    If I have 100% ownership of the investment property, but my partners name is listed on the investment loan for security purposes, does the income and expenses need to be split 50/50?
     
  13. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

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  14. Crank IT Komo

    Crank IT Komo New Member

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