Line of credit question

[asi102]

Hi,

I'm currently trying to clarify something and I just can't succeed to get through to a clear and definite answer. I don't think my case is unique, yet I get mixed answers and opinions but not a final and clear answer. I'll try to explain the details.

I have a Line of Credit (LOC) against my current Principal Place of Residence (PPOR) - we'll call this Property 1 (P1). I had this LOC for about five years, used for private (non-income producing) family expenses and also had our (my wife and I) income coming in regularly. We also have two Investment Properties (IP's - P2 and P3) with deposits and purchase costs covered from this LOC, but we've never claimed the interest on these deposits - and we don't plan to. Each IP (P2 and P3) has it's own separate loan with its own interest that is claimed on the Tax Return on its own - so completely independently and separately from the LOC. Therefore, as I have never claimed anything from the LOC, this has always been used as a private non-income producing account.

We are currently looking to buy another property, P4, but this is for us to move in and be our new PPOR. We would like to put our current PPOR (P1) up for rent and make it an IP. Considering this, our main question is if we can claim some (a portion) or all the interest charged on the LOC from the moment P1 becomes an IP. Once we are in our new PPOR, we will also have all our family personal expenses and income in the a account and we won't use the P1 LOC for this anymore. The P1 LOC will become a dedicated IP loan for P1. I have read the tax rules and Taxation Rulings (especially TR 2000/2) but none of the scenarios covered are for a case like ours, where the LOC was always used only for non-income producing expenses.

If the LOC is considered from the moment has been created (about five years ago), then considering all the income and expenses covered during this period, the account balance for which interest can be considered to claim when P1 becomes and IP is very low or nothing, so little to no interest will be claimable.

If the LOC is considered from the moment P1 becomes an IP (when we move out into our new PPOR P4, so in the future), then the loan from the P1 LOC on which interest can be claimed is high, so it is a considerable amount to be considered.

If this is considered differently, feel free to provide an answer.

Can you help clarify if there is any interest from the LOC that I will be able to claim once P1 becomes and IP?

Thank you for your help into this.

asi102

 

[Rolf Latham]

My guess without seeing the starting statement and the progress statements, that the remnant deductability is zero.

Every Salary and rent credit would have lowered the deductible amount, and every time you pulled cash for other than investment that would be a "new loan" for non ded purposes

LOCs and "all in ones" are an unsuitable product for this application

ta

rolf

 

[Terry_w]

None of the interest on the LOC will be deductible against the property because the money borrowed from the LOC was for personal expenses and not borrowed to purchase this property.

However, some of the interest may be claimable against the IPs in relation to the deposits borrowed. But this will be messy and difficult to work out as you have mixed the loan with some borrowings for personal expenses and some for investment deposits. It is not just a straight split up between the two because you would have made subsequent deposits which must also be apportioned.

 

[GaryT]

Often getting the right information can make a difference to the outcome.

If what you mean by "I have a Line of Credit (LOC) against my current Principal Place of Residence (PPOR)" is that you used the LOC to borrow funds to purchase the PPOR than there may be some residual component of the LOC that is deductible.

However as Rolf Latham says above and as you intimate in your option A, there will probably be very little claimable and certainly the cost to calculate this component would be much greater than the tax benefit!

If the LOC was never used to fund the purchase of the old PPOR (or any IP expenses) than as Terry_W says none of it will be deductible.

Possible options would be a sale of the old PPOR between related parties (i.e. joint tenants to one partner - 50% max) and create a new loan to fund, but stamp duty is an issue. Or just sell it off (or sell to related trust) and buy a new IP with new 100% loan leaving new PPOR with minimum non-deductible debt. Need professional advice here as lots of issues.

There are also issues with CGT to consider.

Moral of the story is to always try have separate loans (or sub-accounts) per property and being aware that there is little tax benefit in renting a previous PPOR that has little or no associated loan.

 

[Peter_Tersteeg]

Even if the LOC was used to purchase the property, it appears that you've been transacting heavily for personal use. It may be possible that a portion of the loan could be tax deductible, but certainly not all of it. Due to the contamination of the use of the loan between owning the property and the personal use, it might even be argued that none of the loan is deductible.

If it's possible to determine how much of the loan is actually for personal use and how much is for ownership of the property, you could spit it into two portions now, with the ownership portion becoming tax deductible when you turn the house into an IP.