Deductibility of Loan to construct 2 investment properties

V

vladg

Hi All,

Need some help confirming my thinking.

Background - A year ago I purchased (100% in my name and with finance) a property on 864m2 with a 4bed house for the purpose of developing into 2 investment properties. The existing house has been rented on a 12 months lease. In the mean time I have managed to get permits for 2 side by side double garage 4 bed freestanding houses (no party wall) and now finalising tender documents etc. About to go to tender in a month or so but thought I would approach my Bank regarding the construction loan.

I have been told that unless I bring my wife into the new construction loan facility, I will not have enough capacity to service the loan in my own right. I can do it in my name but would need to sell some other properties to reduce debt and this I do not want to do.

Question - Will I still be able to deduct the interest 100% (against my salary income) if my wife is party to the loan? My wife does not have any ownership of the current property or the 2 new properties which will be built. In order for her to become a party to the loan we will need to cross collateralize her investment property as additional security.

I am pretty certain that I will be able to as I own the underlying asset but just need confirmation.

Another side question, as I plan to rent out both properties when built, I am expecting the interest expense as I draw down the construction loan while constructing should also be deductible. Am I correct in my thinking?

Thank you for your help in advance.

Rgds Vlad
 
If you add your wife to the title then she will have to be taxed on a share of the profit. This means you can't claim 100% of the deductions either. Perhaps add her only as a guarantor to the loan (without cross collateralisation if possible). It's not good to tie up all your assets together.

As for the tax deductibility while constructing, you need to consult an accountant about that. I suspect yes though.
 
Generally speaking deductability is assigned based on the names on the title, not the names on the loan.

If the title is 100% in your name, any profits or losses should be assigned against your tax returns.

Your wife does however have an interest in the property, it would be wise to consult your accountant on this.
 
vladg said:
Question - Will I still be able to deduct the interest 100% (against my salary income) if my wife is party to the loan?
Click to expand...
You might like to check into a situation where you still own 99% and your wife 1% as tenants in common in unequal shares. This may satisfy the lender / LMI as both names will be on title.

vladg said:
Another side question, as I plan to rent out both properties when built, I am expecting the interest expense as I draw down the construction loan while constructing should also be deductible. Am I correct in my thinking?
Click to expand...
Yes, interest is deductible in this scenario.
 
A general test that can be applied

When the property makes a CAPITAL Gain or a rental income surplus, who pays the income tax ?

In general, it will the person on title, thus that person gets the dedn if there is one.


BUT please always check with our accountant on your personal situation



You should be able to get the wife on the loan without her being on title, or without her being crossed up to yours.

On the surface, while your lender/broker is looking to be helpful, I can see some issues down the track maybe.

These things can usually be solved to YOUR benefit rather than the lenders

ta

rolf
 
Thank you all for such quick responses.

The plan is for her not to go on title. Although, I have considered transferring 1% to her as suggested by Propertunity. I guess this is still an option.

Aaron_C, you mention that the ATO has "a very different view on this". Is there something on their website you can direct me which states otherwise?
3 of the guys responding in general agree that the likely outcome is I will be able to deduct 100% but you seem to have a different opinion? Any specific reason?

Rolf, you mention issues down the track but for the life of me I cannot think of any. Can you please clarify?

I will definitely clarify with my accountant though.

ps. I am dealing with the Comm Bank if that helps.

Thanks again. Vlad
 
Hi V

my biggest concerns have NIL to do with the TAX issues but everything to do with the Cross Coll issues..............

Its hard to foresee what problems you may have ( if any) without the full fluffy stuff around your dealings.

However, my experience with xcoll is in general ok. Its in the circumstances where it does go bad, and you are then STUCK for a month or 3 years.............

Here are just some of the reasons from a post from 10 years ago. Mostly they still apply, and new ones can be added im sure.

You may also be one of the 80 % or so that has NIL issues with Cross coll...........let me ask you, do you have car insurance ?

If there is a clear BORROWER benefit to xcoll, AND you have a strategy to clean it up afterward, Use Cross coll

If not, then avoid.


ta

rolf



Im no finance guru, but will strongly suggest (and at the risk of repeating myself myself that whenever a banker suggest that something isnt a problem in regard of equity contribution, that one takes this with a grain of salt, just as one would taking advice from the ATO on minimising your taxes.

Just seven reasons faced by my clients with cross coll have been :

1. Bank holds all your equity. Says no more money, youre at your maximum service level. Release of property may take many weeks to months or at an extreme the lender forces you to take ALL the loans to another lender.

2. Bank holds all your equity and you have fixed loans. Bank Says no more money, youre at your maximum service level. Release of property may cost squillions because you need to break one or more fixed rate loans.

3. Bank holds all your equity. Says no more money, youre at your maximum service level. Loans once were all at 90 % of lvr, now at 75 %. You want to revalue to 90 % and only pay lmi on the new money. Sorry borrower, please go to another lender and pay new mortgage insurance

4. Bank holds all your equity. LMI says no more money, youre at your maximum exposure level. Sorry borrower, please go to another lender and pay new mortgage insurance

5. Bank holds all your equity. Bank says your estimate of valuations are rubbish, we arent going to give you any more money. Sorry borrower, outcomes as per 1 to 4 above.

6. Bank holds all your equity. Mr and Mrs decide to split assets after divorce. 1.3 mill fixed rate loan crossed over several properties. 63 000 break cost to split it all up and sell some off

7. Bank holds all your equity. You run into financial difficulty, BUT you have lots of equity. You try and move one of your properties to a fast settling no doc lender to release funds and get you of trouble. Bank wont release security, they smell a rat, slow the release of the property, and within 60 days you will have a judgement against you and the sheriff at the door.

Now, lets weigh this against the benefits of xcoll .

1. Maybe reduced fees, UNLESS you do a fair few revals in which case your entire portfolio needs to be revalued every time.

2. Xcoll allows you to pool little bits of equity. Most loans will allow top ups of as little as 10 k

3. Sometimes its the only way the lender will do the deal, and in that case xcoll is better than no loan.


Dunno bout you, but in MOST cases xcoll doesnt present a good argument
 
Rolf, thanks for the information. I thought you were referring to the tax situation. I think crossing might be the only way to get the construction finance but I am still exploring all situations.
I do plan to refinance once I complete the project though.

rgds Vlad
 
vladg said:
Aaron_C, you mention that the ATO has "a very different view on this". Is there something on their website you can direct me which states otherwise?
3 of the guys responding in general agree that the likely outcome is I will be able to deduct 100% but you seem to have a different opinion? Any specific reason?
Click to expand...

Well the 3 guys before aren't tax advisers. Neither am I.

However, having loans in different names to the registered proprietor can cause taxation problems. I have first hand experience of this via a bank mistake. The ATO has a zero-tolerance policy on this and I have legal advice from a barrister confirming this.
 
Aaron_C said:
Well the 3 guys before aren't tax advisers. Neither am I.

However, having loans in different names to the registered proprietor can cause taxation problems. I have first hand experience of this via a bank mistake. The ATO has a zero-tolerance policy on this and I have legal advice from a barrister confirming this.
Click to expand...

I suppose there is never a 100% clear answer in these situations, I will investigate further with my tax accountant in any case.

Do you think transferring a portion of the ownership to my wife will sort this out? ie 1% as suggested previously.

It appears this will enable the bank to lend me the amount I need as it will satisfy their lending requirements and also ensures the deductibility of interest is maintained (even if the proportion is slightly impacted).
 
Hmm I think the 1% transfer is unnecessary because you are husband and wife. So it is obvious she has an interest in the property even though she isn't on title. Don't get sucked into doing something you don't have to.
 
Aaron_C said:
Hmm I think the 1% transfer is unnecessary because you are husband and wife. So it is obvious she has an interest in the property even though she isn't on title. Don't get sucked into doing something you don't have to.
Click to expand...

I had to do it once to satisfy the requirements of a MI not a lender. Lender did not require it but I was doing a low doc at high LVR at the time and the MI wanted it. I did not find it a big deal.
 
vladg said:
.
I do plan to refinance once I complete the project though.

rgds Vlad
Click to expand...

Its that bit where tears are often shed :


Is the financing plan modelled through to that end ? Ie down to lender, lvr and serviceability model.

if yes, then the only thing that may get in your way is personal changes or market conditions, and you should be home and hosed

If not, then at this stage at least the plan looks more like "hope" ..........

Pls note, Im not having a go, I just want delineate the difference between plan and hope, coz hope isnt a strategy, and while tax issues are very important, they may be dragging your attention away from other just as important things


ta
rolf
 
vladg said:
Do you think transferring a portion of the ownership to my wife will sort this out? ie 1% as suggested previously.

It appears this will enable the bank to lend me the amount I need as it will satisfy their lending requirements and also ensures the deductibility of interest is maintained (even if the proportion is slightly impacted).
Click to expand...

I know some lenders have a beneficial interest issue with the spouse being a co borrower without being on title. This has become quite rare and even CBA resi finally dragged themselves into the 1970 last year with the abolition of this requirement.

If your wife goes onto title for 1 %, then she will be entitled to 1 % of the income from the property once generated. Reasonably then again you can expect her to be entitled to 1 % of the tax dedns ...............

If you are really concerned about it then obviously speak with your accountant, and if really still concerned have the loan in ur name only with a guarantee from wifey if the lender will allow.

If all else fails get a PBR ........

ta
rolf
 
Rolf Latham said:
If you are really concerned about it then obviously speak with your accountant, and if really still concerned have the loan in ur name only with a guarantee from wifey if the lender will allow.

If all else fails get a PBR ........

ta
rolf
Click to expand...

Equity is not the problem for me. The reason I need to get my wife onto the loan is because the CBA does not accept servicing guarantees...

What is a PBR?

And by the way, thanks so much for everyone's responses.
 
Rolf Latham said:
k

are u locked to CBA ?

ta
rolf
Click to expand...

Yes until May/June this year. All my debt is structured for investment purposes, so I have prepaid interest for 12 months on all the loans I have with them (5), they are all out of the fixed interest period this May and June. I will then have the flexibility to refinance.
 
You must log in or register to reply here.

Similar threads

V
Deductibility of deposit interest from offset
Replies
2
Views
2K
vlvh
V
davidw89
How to property structure two loans
Replies
12
Views
2K
Terry_w
Terry_w
albanga
Calculating Loan Interest Deduction
Replies
5
Views
1K
albanga
albanga
L
Debt shuffling and tax deductibility
Replies
10
Views
2K
Terry_w
Terry_w
E
How is the tax deductibility going to be apportioned?
Replies
2
Views
1K
EN710
E
Back
Top