Claiming interest on IP

Hi guys.

About a year ago I purchased a property (my first) using the FHOG. The property was rented out (under an existing lease before I purchased) until just under 6 months from the date of settlement, at which point I moved in.

I always intended to use the property as an IP and to just move in to comply with my FHOG and stamp duty obligations.

The loan is for PI, which I understand now was a mistake from reading other posts on this forum for a number of reasons.

Therein lies my question - obviously I cannot claim interest on the loan during the time I have occupied the property and it is not rented out. However, I don't understand why I can only claim interest when the property is rented out if it is IO rather than as PI. I have read a few posts on this forum where people say that if you intend to change the property from PPOR to an IP then you must have an IO loan to claim the interest.

Can someone please explain?
 
Hi Earlyretirement,

You don't have to have an IO loan. However, you can only claim the interest portion of a P&I loan on an investment property.

IO loans are generally the preference of investors because they can claim all the interest and the lower repayments allow for more cashflow and the ability to borrow more.

Cheers,

Jamie
 
and also, if you have made any redraws (for non-investment purposes) then this will further complicate how much you can claim (e.g. unless im mistaken, if it was 100k loan and you made a total of 10k extra repayments and then total 10k redraw, as far as ATO is concerned you now have a 110k loan of which only 100k is for investment purposes, so can only claim 100/110 * interest as deduction).
 
Thanks Peter. The one thing I did right was get an offset account attached to the loan so I'm not making any extra contributions, just putting money in the account. I haven't redrawn any funds thankfully :)
 
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