Loan Structure for Capitalising Interest

Could someone give me an insight into how loans must be structured in order to be able to claim capitalised interest as an income tax deduction - or can this not be done? It seems that various people are doing but I just want to know how.

We could use the example of 1 PPOR and 1 IP. I initially thought I would structure as follows:

PPOR - LOC
IP - IO loan for bulk of loan with another LOC to cover the shortfall each year between the interest charged and the rent received.

However, I understand this would not allow me to claim the capitalised interest as a deduction??

Or do I have it all wrong in that the term 'capitalising interest' simply means increasing debt to service shortfalls and this term has nothing to do with tax deductions.

Any suggestions would be appreciated.
 
"Capitalising Interest" implies the interest gets added to the loan by the lender and not paid in cash (just like many margin loans operate). As for being deductible, that would depending on many things but most importantly the original purpose of the loan.

Interest costs for one loan may also be borrowed from another loan. This gets more complicated and ultimately is the same as above. The structure and the "scheme" start to matter more.

If in doubt, get a private ruling. I did, wasn’t hard. But also ensure the ruling covers you for Part 4A (which I didn't :(), then you covered even better.

Search this site and www.invested.com.au for many threads.

Here is one I prepared earlier.

http://www.somersoft.com/forums/showthread.php?t=20032

And a good one on Invested

http://www.invested.com.au/4/private-ruling-adventure-908/
 
Thanks heap for the detailed replyas it was most informative. I have put the question of my scenario to our accountant to seek his input and referred to the ruling you referred to.

Given the purpose of my second loan is purely to fund the shortfall/loss made by my income producing asset, then my understanding is that this interest would be deductible - hope my accountant agrees as it means I am on the right track?

Thanks again:)
 
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