loan and tax deductibility

[Tigger]

Hello,
this is my first post and I hope someone can advise. I expect you will just confirm my understanding to be correct, but I have been told the laws have changed so maybe I'm now out of touch?

I understand that for you to claim tax deductibility on a loan it has to be taken out to buy/build an income producing property? That's how it used to be anyway. I'm debt-free with my own cottage + a neighbouring rental.

I have taken out a loan to build a 2nd house on the back of the block which already has the rental on it. The new house will become my residence. I will then rent out my cottage (current home). I figure I would not be able to claim tax deductibility on the new house I'm to build, but I have been told I could "shift" the loan to my cottage once I move out.

This is a very attractive idea, but I fear not terribly legal! Can anyone advise if the laws have changed of late?

(I've had reservations about my accountant in the past and am reluctant to go back for advice on this matter. I'm thinking a new accountant would be a good thing at this time, since I find I don't have confidence in my current one.)

Thanks in advance,
Tigger

 

[cmason]

My understanding is deductibility is determined by the purpose of what the funds are being used for. The purpose you are using them for is to build a new PPoR which to me would suggest the interest would not be deductible

 

[Propertunity]

..... but I have been told I could "shift" the loan to my cottage once I move out.

You have been poorly (read 'wrongly') advised on this aspect.

 

[Perp]

I have been told I could "shift" the loan to my cottage once I move out.

Nah, I don't think so, either, Tigger.

The only way you could get around it, AFAIK, is if your spouse, or a Trust you control, buys the cottage from you with a loan, and you use the cash to build your new PPOR, and the Trust/spouse is the landlord of the cottage as an IP. The loan interest would then be deductible to the Trust/spouse.

 

[neK]

Stay in your PPR and rent the new one out would be your best bet.

Otherwise you stand to be taxed on the income on your current home (which has no loan) and the new place you build would not be tax deductible at all.

 

[Perp]

Stay in your PPR and rent the new one out would be your best bet.

Well, from a tax perspective, yes, but believe it or not, the motivation for building a PPR isn't usually related to saving on tax. LOL

 

[RumpledElf]

Yeah, we're the same. The new PPoR would attract high rent, loads of depreciation and all that jazz but we'll be renting out the older house - lower rent, probably some depreciation from the renos but not much, and a comparatively small loan. The house before was rented with an even smaller loan. But hey, the income will be nice and will help pay off the new house.

 

[Tigger]

Thanks

Hi guys,
thanks for that, it's confirmed what I thought. The effort has also confirmed that I don't have confidence in my current accountant so I'm off to get a new one (he wasn't the person who gave this advice, but I now realise I don't have confidence to go back to him for further advice).

Yes it would be more pragmatic to rent the new house, but we are both getting older, it's being built in a location and to our requirements to suit us as we age, so it's definitely not a rental. One of the reasons we're doing this is because I've retro-fitted the cottage as much as I can and it is still not easy to live in. But the depreciation from the renos will sweeten the deal somewhat.

Also, if the interest on the loan isn't tax deductible, I can handle my finances differently to make the most of the redraw facility. So that's what I'll be talking to my new accountant about. Thank you all very much for the opportunity to think out loud.

Kind regards,
Tigger