How to Claim interst payments as Tax deduction?

Discussion in 'Accounting and Tax' started by vtek, 18th Jun, 2007.

  1. vtek

    vtek Member

    Joined:
    18th Jun, 2007
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    Sydney
    Hi all,

    About 1 year ago my brother and I purchased our family home from my parents who were struggling to pay off their mortgage.

    My brother and I bought the place and we all continued to live there.
    My parents pay us what they can which might be a couple of hundred bucks a month.

    We are on a interst only mortgage, approx $2400 (soon to increase to $2700 after honeymoon period ended) per month of interest only payments.


    I moved out recently and rent a place else where and would like to know if :
    a) I can claim my portion of interst payments as Interest deductions on investment property?

    b) Can my brother also claim any? He still lives there but also recived some of the rental income from parent (although not a huge amount)

    c) What is required to claim interst payments on tax? Is it as simple as plugging in appropriate amounts into e-tax or does something official need to be set up for this to happen?

    Any help appreciated

    cheers
     
  2. The Y-man

    The Y-man Member

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    Probably need to set it up as a "rooming house" structure - i.e. renting out rooms to your parents.

    The rent will need to be "arms length" rates.

    Cheers,

    The Y-man
     
  3. li21

    li21 Member

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    25th Feb, 2005
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    What does it mean arms lenghts?

    Im curious too. Im looking to get into my first investment property soon and I'd like to know what is required to start claiming hte interest payments as a deduction
     
  4. Mry

    Mry Member

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    a) While you are living in the house, you can claim that you and your brother owned and lived as an owner occupier and that your parents were just co-habitating. If you do want to claim interest over this period, things may be a bit messy.

    For the period that you moved out, and I am assuming that you own 50% of the property, your brother and your parents are responsible for paying you rent equal to half the market rate for renting the entire property out. They can assign a proportion of the rent for each of them according to whatever ratio they care to use, but you are still entitled to that rent for the occupation of the property.

    Why is market rate rent important? Because if the costs for running the property exceed the rent you receive, you claim the difference as a tax deduction (ie negative gearing) and get some money back on your tax. If the rental charge is below market rate, you are unable to claim a negative gearing loss and any costs beyond the income are lost.

    I hope that is a simple enough explanation.

    b) In order for your brother to claim a tax break, he would have to charge your parents rent. That would depend on how much of the house they were 'using' that you would have to charge them for. If the parents used say half the house and your brother used the other half, he could charge them 1/4 of the market value of the house in rent and claim half the interest he was being charged. He cannot claim interest for the parts of the house that he lives in.

    c) See a tax agent to do your return. You need to cover a lot this year. Its not just interest but rent, rates, borrowing costs, possibly depreciation and any other costs in running the property.
     
  5. Bushy

    Bushy Member

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    29th Sep, 2002
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    Location:
    SA
    Don't forget as soon as it becomes an investment you have to pay Capital Gains Tax when you sell. So if you go down the path of turning it into an investment it would be wise to get a valuation for your cost base.

    Your parents might also be able to get Rent Assistance depending on their circumstances, and therefore pay you rent directly for your half of the house. Your brother will have to cover his half with no relief thou.

    You need to work out all the positives and negatives- short term and long term because at the end the tax breaks might not be worth it.
    Not advice - Just ideas
    Regards Bushy