Borrowing to pay a deductible loan

Hi there,

If I used 10k from say a bank overdraft facility to pay for eg. an investment property stamp duty expense, and later on fully repaid that overdraft facility (which has a high interest rate on it) with funds from a LOC (with a lower interest rate) secured against another investment property, is the interest on the drawn LOC funds tax-deductible?

Thanks
 
Stamp duty payment is a capitalised expense.

If you use LOC to pay for its interest, you would need to separate the capitalised component from normal expenses when it comes to tax time.

In other words, the LOC becomes "contaminated".

Do you want to do this? :confused:
 
Hi there,

If I used 10k from say a bank overdraft facility to pay for eg. an investment property stamp duty expense, and later on fully repaid that overdraft facility (which has a high interest rate on it) with funds from a LOC (with a lower interest rate) secured against another investment property, is the interest on the drawn LOC funds tax-deductible?

Thanks

The short answer is yes, I'm not sure what Kenster is on about.
 
Hi guys, I believe Kenster was trying to determine whether the LOC was arranged for personal use or investment purposes. Although I am not an accountant I believe if the LOC was for personal use then the interest claimed on the investment debt would be reduced over time as any amount credited to the LOC is deemed to repay the investment debt first.
 
Sorry, to clarify, the LOC is only for investment property expenses.

And the bank overdraft facility hasn't been used for anything else before.

I think the short answer to my own question is yes...?

Just interested in what others think...
 
Stamp duty payment is a capitalised expense.

If you use LOC to pay for its interest, you would need to separate the capitalised component from normal expenses when it comes to tax time.

In other words, the LOC becomes "contaminated".

Hi, Kenster,
Not sure what you mean. Yes, stamp duty is a capital expense in that it's added to the cost base and not deducted up front. However, interest on borrowing to pay for a property and stamp duty is generally all deductible?
 
Hi, Kenster,
Not sure what you mean. Yes, stamp duty is a capital expense in that it's added to the cost base and not deducted up front. However, interest on borrowing to pay for a property and stamp duty is generally all deductible?

Am assuming the cost of stamp duty and other purchasing costs forms part of the income producing asset itself. ie. the IP. Interest incurred when purchasing assets purely for cap gains are not tax deductible.
 
Yes, stamp duty is a capital expense in that it's added to the cost base and not deducted up front

Agreed.

However, interest on borrowing to pay for a property and stamp duty is generally all deductible?

Interest on property expense is treated as operating expense, therefore, is claimable on the year it is incurred.

Whereas interest on stamp duty (capital item) is treated as capital related, therefore, is claimable on sale of asset.
 
Whereas interest on stamp duty (capital item) is treated as capital related, therefore, is claimable on sale of asset.

Wow Kenster, I've never heard of that one before?!

Might need to check this......

Others agree with this??
 
Interest on property expense is treated as operating expense, therefore, is claimable on the year it is incurred.

Whereas interest on stamp duty (capital item) is treated as capital related, therefore, is claimable on sale of asset.

I have to say I've never heard of that. So if I buy shares with borrowed money, the interest on the brokerage will not be deductible and form part of the cost base? I've never heard of that, either. How about borrowing to pay for legals, which would usually be capitalised into the cost base?
 
If Kenstar is right then myself and I suggest hundreds of thousands of others are incorrectly claiming that interest.

If you buy an IP for $400k and borrow 90% ($360k) against the property and the other 10% plus costs (including SD) ($70k approx) against another property then I believe you can claim the full interest on both loans.

If Kenstar is correct you would have to split these loan further so the capital costs would have to be on a separate loan and interest only claimed when sold.

I don't know of anybody who has ever done it that way.

Cheers

Bigtone
 
Whereas interest on stamp duty (capital item) is treated as capital related, therefore, is claimable on sale of asset.

I have used borrowed funds for Stamp Duty on more than one occasion and my accountant is more than happy with me doing this. Although I am not an accountant myself, I believe you may be mistaken.
 
Agree with the others who say it is deductible. I've never apportioned anyone's loan into the component for the house, and the component that relates to the buying costs. If what you said is true Kenster, then I'd say that 99.9% of people are doing it wrong. To be honest it doesn't even make sense to me. The stamp duty is just part of the cost base of the house, the interest on the house is deductible so why wouldn't the interest on the stamp duty component be deductible?
 
Hi

The interest on funds used to pay for the stamp duty is deductible. The fact that it is capital or not is irrelevant in this case.

Alysha

www.gatherumgoss.com

To summarise this into one sentence, am I correct in saying that it comes down to the intention of the borrowings, i.e.: the borrowings are for investment purposes and interest on the borrowings is therefore deductible, regardless of the underlying nature of the expense?
 
To summarise this into one sentence, am I correct in saying that it comes down to the intention of the borrowings,

Yes

i.e.: the borrowings are for investment purposes and interest on the borrowings is therefore deductible, regardless of the underlying nature of the expense?

If it is an income producing investment such as an IP, then yes it is deductible.
If it is a non income producing investment such as a holiday house, then not deductible but does get added to the cost base.
 
If it is a non income producing investment such as a holiday house, then not deductible but does get added to the cost base.

Hold on. I don't get that. You're saying interest on an asset purchased for private use (but which doesn't have the PPOR exemption) gets added onto the cost base for CG calculations?
 
Hold on. I don't get that. You're saying interest on an asset purchased for private use (but which doesn't have the PPOR exemption) gets added onto the cost base for CG calculations?

That was my understanding, but I could be wrong. I've only come across a holiday house once a few years ago, and that's how I was advised to treat it. Also added to the cost base were repairs, rates and other costs. I'd actually be interested to hear what other people think, I was confident this was correct, but now that it's been questioned maybe I was wrong.
 
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