Hi,

Can anyone tell me....if I withdraw money from my UK mortgage, reducing the balance to the point where the interest charged is greater than the rental income, can I claim the full interest as a deduction per negative gearing?

The ATO website seems to suggest it only applies to loans used to purchase the property so not sure if I can deliberately reduce it to take advantage or not.

Thanks

Caroline

It depends on what you are going to use the money for.

If you use the money to buy a car, house to live in no you cannot.

If you use the money to improve the IP, buy shares, another IP, etc yes you can.

The criteria is the money must be used to generate an income.

Interesting question...... Wish I had thought of it before I sold the property!

Hi Guys,

There are a few of us that would be interested in this. Please provide the relevant links.

I was advised by my accountant here you cannot. Otherwise we would not be in he strife we are now in!

From ATO web site

Interest

If you borrowed money to buy shares, you will be able to claim a deduction for the interest incurred on the loan, provided it is reasonable to expect that assessable dividends will be derived from your investment in the shares. Where the loan was also used for private purposes, you will be able to claim only interest incurred on that part of the loan used to acquire the shares

http://www.ato.gov.au/individuals/co...tm&page=12&H12

You can replace the word shares with anything that generate an income.

You cannot remortgage your UK property to buy a home in Oz to live in. You can remortgage your UK property to buy an IP in Oz. This doesn't help most people.

Do you know if you can remortgage your UK property to start a business in Oz? I think an investment property would be a recipe for disaster with the current exchange rate and the declining house prices in both countries.

If it generates income I cannot see why not. You would have to convince the ATO if they suspect your pulling a fast one. No idea about the UK tax situation as been away for 20 years.

One idea I had for remortgaging overseas home is to use money to buy Oz shares (interest payed would be tax deductible as it's used to produce income, dividends). Sell shares after 12 months and use money for whatever you like. Not sure whether this legal or not but very much doubt it.

I don't think you understand negative gearing, you don't claim the full interest but only the difference between the interest/expenses and the rent/income.

In regards to your actual question the answer is as follows:

Yes, you can gear with overseas assets (borrow to fund the purchase with the interest & other operating costs exceeding the rent), and claim the net loss against other Australian income.

But, but, property only ever goes up. Doubles every 7 years don't you know?

Anyway, it's interesting that it looks like interest is deductible only on loans used to purchase dividend producing shares. So I'm guessing the interest is not deductible if you buy non-dividend producing shares and stuff like ETFs.

I don't think I understand it either. When I read it, it looked like all interest against the loan could be claimed as an expense and at the moment that is what I do.

Thank you for your input everyone, it's clarified my thinking. When I took out the loan it was to buy the house which we then lived in, it wasn't an investment property at that time. Technically I wouldn't be re-mortgaging, I'd be drawing down overpayments, so not a new loan and wouldn't qualify as taking out a loan for investment purposes.

I'm thinking that over a long term - 25yrs, it's better to have a low mortgage than negative gearing anyway.

This would not be legal - as once you sell the shares the interest on the debt (the loan you took out) is no longer for an income producing asset. So you can certainly sell them, but then you could no longer claim the interest for taxation purposes unless you then went and bought something else that was income producing.

As to over-payments - over payments on a mortgage are treated as a principle reduction by the ATO. You can not say, "well I overpaid so therefore if i take those funds out, the entire loan is deductible for negative gearing". This is not the case and as identified above, its the purpose of the funds that you redraw that is the key to deductibility/negative gearing.

Offset Accounts:
In future, if you think you might like to rent the house out that you currently own and live in, then you should get an offset account. An offset account and overpayments in to it are treated exactly like overpayments into the mortgage as far as interest reduction and savings is concerned. However, the ATO treats offset accounts differently and funds placed into an offset account are not treated as paying down the mortgage. Therefore, when redrawed, regardless of purpose, full negative gearing benefits are preserved.