MrsDagboy

Hypothetical question - :

If you owned an investment property, but owed no money on it ie. owned it outright, no mortgage, but then you subsequently took out a mortgage over it, would the interest on the loan be tax deductible?

ABCDiamond

Short answer is NO.

Unless of course, the named owner of the property borrowed the money from another individual, prior to needing to get an official mortage, and the mortgage was obtained purely to repay that amount, to that person, maintaining a 100% link to the investment property.

MrsDagboy

:scared: :scared: :scared:

OK, will definitely be rethinking our strategy then LOL .

ABCDiamond

If anyone is planning on doing this, the best option is to utilise mortgages with the 100% offset facility, thereby creating a tax deductible vehicle, but without needing to pay interest until you need to.

MrsDagboy

Lost me there .

Will PM you.

Kiwipaul

[QUOTE=ABCDiamond]Short answer is NO.

QUOTE]

I don't agree with this as it depends on what you do with the money from the property. If you use it for personnel use buy a car, house to live in you are correct.

BUT if you use the money to buy investments stocks or shares or another investment property then the loan would be fully tax deductable (on the interest payments anyway).

This same rule applies to UK, NZ and Oz, to the best of my knowledge.

ABCDiamond

You are Correct to correct me on that point

My answer was overly short, based on my experiences, and therefore assumptions (which I tell others never to make! ), that it would be similar situations to the majority that have asked me before ie: for non deductible use.

MrsDagboy

Yep KP, ABC knows me too well , for non deductable use (house renos).

Doesnt matter, we have another strategy already waiting in the wings .

Kiwipaul

Must admit you don't make a mistake very often at all you must have been rushed today.

The only way around this problem I can see is if you've got the time is to take the loan out on the investment property and buy some stocks or shares and then you have fullfilled the requiremnet for tax deduction of the loan. After a period say 12 months sell the stock and hence you have the cash with the loan tax deductable. Not sure if this is legal or not (I suspect it is not as its to easy to get around the problem this way).

MrsDagboy

:scared:

ABCDiamond

I am pretty sure that wouldn't work, as the loan, although secured by the property, would be linked to the shares, and, on sale of the shares, would no longer be deductible.

The ATO don't make it that easy for us

MrsDagboy

So second scenario - if you mortgaged investment house1 to pay for building (or removal) of a house on to a block of land (with a mortgage) that would be deductable I presume?

Alan Collett

I think you'll find that the PURPOSE of the loan is the key - if it is to acquire an income generating asset the interest on the loan may well be deductible.

Best regards.

MrsDagboy

Well thats what I would have thought Alan - but its the "may" bit that worries me .

ABCDiamond

I'm trying to get my head around this one

Not sure if my headache is caused by thinking about this, or the fact that my daughter had a friend over for a sleepover last night !!!