Investment Tax Deductions v's PPOR

[Suep]

Currently we own a unit and reside in it as our PPOR. Recently we purchased a house and intend this to become our PPOR and rent out the unit. We are refinancing the unit and will have a personal debt of approx $75k on this property and an investment mortgage portion of $255k. I have been advised that we can claim the interest incurred on whole mortgage ($330k) as a tax deduction if we reside in the new residence for a period of time, however I do not think this is correct. I would appreciate any input into this matter.

 

[coastymike]

How much do you actually owe on the unit which will become your investment property ? Is it $75K or $255K ? Whatever is outstanding on your current PPOR will be the amount which will be used to determine interest deductibility when it converts to an investment property.

The interest incurred on the full $330K will not be deductible.

 

[Mry]

And they want to allow people other than tax agents to be able to give and charge for tax advice. What a joke.

At the risk of being rude to your mortgage broker, I'd question whether they have your best interests at heart or if they are competent in this area. Any mortgage broker that has been brokering for at least 6 months would know that it is quite dangerous to mix IP and PPOR loans together and at least something about tax deductible interest claims against properties.

 

[coastymike]

Mry,

Exactly. They talk about loosening the laws regarding provision of tax advice yet are making comments that Real Estate agents might need to have a special FSR license to provide advice re real estate for investment purposes.

Crazy

 

[Suep]

Thanks for your info. I've had a chat with the ATO and apparently it has to do with with what the purpose of the loan was originally set up for. If we leave it the way it is we can only claim the interest on the amount owing ($75k) on the original loan of $175k. However if we refinance the unit for the purpose renting and investment then we can claim expenses on the new $255k mortgage.

 

[Simon]

And they want to allow people other than tax agents to be able to give and charge for tax advice. What a joke.

At the risk of being rude to your mortgage broker, I'd question whether they have your best interests at heart or if they are competent in this area. Any mortgage broker that has been brokering for at least 6 months would know that it is quite dangerous to mix IP and PPOR loans together and at least something about tax deductible interest claims against properties.

I am a little confused here....why are you blaming his broker?

I am not sure that the ATO has explained it correctly. But it may be your wording confusing me.

The bottom line as to whether a loan is deductible is tied to what the money was spent on. If you buy an income producing asset then the interest can e deducted.

So if you borrow against an IP to buy a home then no deduction. If you borrow against a home or an IP to buy an IP then it is deductible.

As always please don't act without seeking advice from a professional.

Cheers,

 

[Mry]

I am a little confused here....why are you blaming his broker?

Because the broker is giving (really bad) tax advice to induce someone to enter into a loan product. Do they really care about Suep's financial position and ensuring the products are good and the advice suits her situation, or are they just after their brokerage ASAP? I would also expect them to know something about the tax effect of loans on properties, but I would also expect them to tell their customer to seek tax advice from their accountant. Just as you did.

I can see on second glance that the loans are separate (I found the original post a bit hard to read) so my comments about mixing the loans is void. I'm still annoyed about the tax advice part though.

Suep, I think you need to see a good accountant. That part about refinancing is wrong. It could cost you a lot of money if you don't get good advice from the start. I can't tell you how many times I have to actually teach ATO staff things about the tax system they are supposed to administer.

 

[Simon]

Now I am really really confused.

Suep hasn't even mentioned that he used a broker?

Perhaps this advice came from his banker, accountant or neighbour?

Have I really missed something or have you jumped to a conclusion visible only to yourself?

Sorry if I seem dumb here - I am just a broker myself...

 

[Mry]

Hmm, you are correct. I have found in the past though that all the misconceptions clients have with respect to interest claims have come from the people they sought mortgages with so I guess I was prejudging the source.

Suep, who gave you that advice about the interest?

 

[Richard Hunt]

Suep,

The basic rules Simon provided above are good rules of thumb to follow.

If you need a higher level of comfort it may be prudent to get a qualified professional to review your specific circumstances before undertaking the relevant transactions.

 

[Suep]

Thanks to all for your info. No it was not a broker that we originally received the advise about, in fact it was an accountant who did not provide the whole picture nor could convey the infor to us. We have now found ourselves a good team (financial adviser & accountant) who work in conjunction with each other (and talk on the same level)