Home Issues - the BFO (Blinding Flash of the Obvious) thread

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From: Mike .


Claim previous home interest
From: Sue1
Date: 12/11/99
Time: 3:29:45 PM

It was mentioned (actually by Les)in a previous posting that you "can't" claim the interest on a mortgage on a house that you previously lived in as your principle residence. Are you absolutely sure of this? Because we are currently doing just that with the help of our Accountant!

We lived in another state for 8 years and when we decided to return home to Qld we decided to rent out our house (the mortgage was very low) and buy another cheap house in our new location. We did this because our first house was in an excellent location and we thought we might return one day, and because we could manage another mortgage on the next house if we had tenants paying for the first house. We have been claiming the interest on the rented house (our previous residence) for three years.

My understanding is that the purpose of the loan has to have been to purchase the house you are claiming the interest against, whether or not you originally intended to rent it is irrelevant.

From memory Jan and Ian's first few rental properties were purchased in this way and I understood that they were considered investment properties from the day they were made available to be rented, along with all the associated tax rebates and depreciations etc. Please feel free to comment as I am finding this very disconcerting. (Thank goodness the interest involved in my case is very small!)

Sue

 

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Les

Reply: 1
From: Mike .


Re: Claim previous home interest
From: Les
Date: 12/11/99
Time: 4:38:46 PM

G'day Sue,

A very good point - obviously if you are doing it (and Jan and Ian had too) then it CAN be done.

Over the years I had heard many respected people (one name I remember was Noel Whittaker - there were many others) saying "Don't buy a new home and rent your old one - you lose out double - instead, sell your old home and use the proceeds to buy another rental house; that way, the Mortgage is a Tax Deduction."

In most cases I advise to CHECK IT OUT - I have heard there ARE ways around it (like if the home was in hubby's name, then wife can buy it - or something like that) but any moves in that regard SHOULD be done through the proper channels (like, your Accountant). It's a very complex area - certainly one that should be properly appraised before doing it.

"Am I absolutely sure?" - No, I'm not (so please don't be TOO disconcerted ;^) - but I believe the ATO "deems" the mortgage to have been taken out either to buy a home, or to invest in something. And this deeming thing is the really the crux of the matter.

If I can find the actual ATO text, I'll post it here - I could do with being a little more sure about it, too.

Don't be worried, though, Sue - you have gone through your Accountant, rather than just putting in a Self-Assessment, so it sounds like you are in the clear anyway.

In that "previous posting" I hope I remembered to say "Check it out" ???? I try to make it a habit, especially in THIS area, as it appears to be one of those "grey" areas.

Have a good one, Sue

Les

 

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Les

Reply: 1.1
From: Mike .


Re: Claim previous home interest
From: Les
Date: 12/11/99
Time: 6:50:23 PM

Sue,

I knew that others also advocated "don't rent your own home" - I just couldn't remember who they were.

I found this (following) in the very first article from this forum. The writer mentions it is from the Q & A section - but I didn't find it in there today .... :^(

Anyway, Noel Whittaker was one, .... ;^)


Re: Am I Number One? From: Mark Noonan Date: 9/11/99 Time: 4:58:45 PM Remote Name: 202.135.142.201


Comments Hi Chris,

I just copied this from the Q&A on this site, which may help with some of your questions:

We own our own house but want to borrow money against this house to build a bigger and better house in which to live. We would still like to keep the one we're living in now as a rental property. Is the loan tax deductible?

The short answer is no, the loan is not tax deductible. This is a classic situation in which many property owners find themselves when they first decide to upgrade. Assessing whether interest on a loan is tax deductible depends on the purpose of the loan – not the collateral for the loan. In this case, the purpose of the loan is clearly to build a new home and not for the purpose of producing income. This situation is a double loss. Not only would the interest on the loan not be tax-deductible, but the rent from the investment property would be taxed at the highest marginal tax rate.

A simple solution could be to sell the first home and put the proceeds into the new home; you would then borrow to buy a rental property, using the equity in the new home as collateral. The interest on the loan would then be tax-deductible and instead of paying tax, a tax refund would more likely result.

However, there may be alternatives. For example, if the first home had been bought in the wife's name only, the husband could borrow the money to buy the property from his wife, and she could put the money she receives towards the new house. A legally binding contract is needed, and stamp duty must be paid, however, the tax benefits may far outweigh the transfer costs. I would recommend that you check with both your solicitor and accountant before you attempt any transaction of this nature. ------------------------------------------

As you can see there are catches to doing what you want!

Cheers, Mark


Les again - I suspect the "loan" they refer to is the loan to build the new home - it doesn't mention any existing loan on the old home. But it's interesting that they advocate selling the original home, and buying a new rental property - a sure way to add extra costs to the equation. Maybe, since it is no longer in the Q&A section, there have been some changes to the law that make this "renting of your own home" less of a problem?

FWIW, Les

 

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Les

Reply: 1.1.1
From: Mike .


Words from the Tax Office website -
From: Les
Date: 12/11/99
Time: 5:26:19 PM

Comments
G'day Sue,

Now you can DEFINITELY stop worrying. You are in the clear. Obviously my knowledge is either "old", or just plain misguided. Thanks for pulling me up on it.

Anyway, here are the words (verbatim) from a booklet from the Australian Tax Office titled "Rental Properties 1998 - 99" :-

"Some rental property owners borrow money to buy a new residence and then rent out their previous residence. If there is an outstanding loan on the old residence and that property is used for income producing purposes, the interest outstanding on the loan, or part of the interest, will generally be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new residence because it is not income producing. This is so, whether or not the loan for the new residence is secured against the former residence."

So says the ATO via a booklet that is available free from their website www.ato.gov.au or available free from their offices.

Old habits die hard, but I will continue to recommend that people renting out their old homes seek the appropriate advice (Accountants, etc). However, it seems certain that your old home CAN be rented, and (part?) of the mortgage already existing on it can be a Tax Deduction. (I just get a bit concerned when the Tax Office states "PART of the interest will GENERALLY be deductible" - is there more to this outside of this 16 page handout?)

Sue has done it right - an Accountant has set it up - I recommend others do the same for this situation.

Thanks again, Sue

Regards, Les

 

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Sue

Reply: 1.1.1.1
From: Mike .


Re: Words from the Tax Office website -
From: Sue1
Date: 12/19/99
Time: 7:08:54 PM

Thanks Les, I'm so glad that you understood that I meant the existing loan on the original house and not some new loan secured against the old house for the purchase of the new.

It's not an easy concept to get across. Wow, its so easy to get confused between the two scenarios but there is a world of difference as far as the ATO is concerned. And don't you love the way whenever they say you CAN do something its peppered with words like "generally" and "or part of" but when they are saying you CAN'T do something the words used are a definite "cannot claim" or "will not be allowable".

Keep up the good work and Merry Christmas and a Happy New Millennium to all our forumites.

Sue

 

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Les

Reply: 1.1.1.1.1
From: Mike .


Re: Claim previous home interest - a "blinding flash of the Obvious!!"
From: Les
Date: 1/21/00
Time: 5:38:19 PM

G'day Sue1,

Last night I was discussing property with my son, and the conversation led to my experiencing a "blinding flash of the obvious!!"

Since it relates to the subject just covered here, I thought I'd post the reply here even though this article is now 6 weeks old. Thought it may help others who read this later.

Earlier I had entered articles in which I quoted advisers who say "Don't borrow against your old home to buy a new home, and then rent the old one - it costs you dearly" Instead they suggest you should SELL your old home, and purchase another house as a rental, as well as your new home.

And the "blinding flash" was this:- Where people are looking to upgrade their home, and about to rent their old home, it is common that they would have already paid off a large chunk of the mortgage, if not all.

IT IS THIS FACT ALONE that makes advisers says "Sell your old home ...." as you have little, or no, mortgage payments to claim, and any rental income is taxed at your marginal rate. And any borrowings against it, to purchase a new home, are not deductible.

THAT'S IT!!! Nothing mystical, nothing "dangerous", but the way it was "touted" had led me to think that even an EXISTING mortgage for the purchase of your OLD home may not be claimable - NOT SO!

Sometimes "the obvious" can be interpreted differently by different people - like the road rules that apply to a dual-lane roundabout !!!!

Of course, if your old home is pre 1985, why would you WANT to sell it, especially if it is a rentable proposition? Instead, it is possibly far better to borrow "up to the hilt" against it for another rental property purchase.

Hope my "blinding flash" helps to turn on the light for others, too - and my apologies if my previous thoughts were misleading (but they DID create a stirring discussion, eh, Sue?).

Regards, Les