Interest only or P&I?

I'm just wondering if anyone can answer this question:

Does the use of the funds for a loan determine whether or not that loan is tax deductible, even if the loan is attached to an investment property?

This is what we have been told but we are wanting some advice / second opinions:

The $200k loan (IO) is regarded as an investment loan. The interest on this is tax deductible, whereas the loans of $500K (P&I) and $100K (P&I) are for the purpose of purchasing your owner occupied property. The interest on these loans is not tax deductible. The use of the funds determines tax deductibily, not the property securing the loan.

To give you a bit of background about the above-mentioned scenario:

Apartment 1 which we are purchasing to live in requires a $500k loan and we have made this P&I.

We are refinancing our investment property, Apartment 2, in order to raise enough funds to purchase Apartment 1. So Apartment 2 now has 2 loans attached to it - $200k Interest Only loan to refinance that property, plus a separate $100k Principal and Interest loan to secure Apartment 1.

We are trying to work out if the $100k loan on Apartment 2 should be IO or P&I.

Can we claim the $100k loan for tax purposes or not, since it is being used as security for Apartment 1?

Any information you could provide would be most appreciated.

Thanks!
 
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The $200k loan (IO) is regarded as an investment loan. The interest on this is tax deductible, whereas the loans of $500K (P&I) and $100K (P&I) are for the purpose of purchasing your owner occupied property. The interest on these loans is not tax deductible. The use of the funds determines tax deductibily, not the property securing the loan.

This is the correct part - It is the purpose of the loan that is important, not the security provided.
 
Id try and have all loans as IO

Then for the loans that are non ded, have an offset accounto those and plough all your spare cash and rent through those.

Depending on your LVR and income position a debt recycle strategy may work really well for you and convert that nice PPOR non ded debt into deductible debt quite quickly.

ta
rolf
 
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