Purpose of the loan

From: Adrian See


Dear forum

I would just like to clear something up that I am not 100% sure of.

If I take out a loan for my principal place of residence, live in the place while renovating for a year and then rent it out, I will be able to claim the interest as a tax deduction when it is up for rent won't I?

Also, I moved into a new apartment 2 weeks ago and the loan is an investment loan. I will live in the place for up to 6 months which is basically the end of June, then rent it out. Would the experienced people recommend making it a rental property on the 1st July to make taxation simpler or does not make any difference. When does it actually become a rental property so that I can claim deductions, the day I advertise it for rent?

Regards

Adrian See
 
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Reply: 1
From: Rolf Latham


Hi Adrian

While you are occupiying the premises and it is not available for producing income I think you would get a hard time at audit if you claimed for interest during that period.

Once you have the place available for rent then I believe you can claim the interest.

The second thing is not so easy. Under the terms of your loan contract you are to notify the lender of the change.

Ta

Rolf



Rolf
 
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Sim

Administrator
Reply: 2
From: Sim' Hampel


Yes, once the property becomes income producing you must declare all income, and any you can deduct the interest from any borrowings used to fund the purchase of the property. Be careful that you don't use the funds for other personal expenses - say if you have a LOC... only the interest from that part of the loan for the property is deductible.

A property becomes a "rental property" the day it becomes available for rent - you do not necessarily have to have a tenant in it yet.

As for timing... the ATO has clear guidelines as to what to do when a property is only available for rent for part of the year - clear examples are provided to work out how to apportion the expenses based on the number of days it was available for rent.

I suggest you read the ATO booklet on Rental Properties at:

http://www.ato.gov.au/content/Individuals/9033.htm

or download a PDF file straight from:

http://www.ato.gov.au/content/individuals/downloads/RentalProperties2001.pdf

 
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Sim

Administrator
Reply: 1.1
From: Sim' Hampel


When I moved out of my house and got a tenant in, I rang my lender (NRMA at the time) and told them what I had done. They didn't care.

Of course, other lenders may want to do something like charge you more interest for an investment property.

Are there also things like consumer credit code issues Rolf ?

I'm guessing it really depends on the lender as to what their response will be.

Rolf... have you heard of any negative reactions from lenders in this matter ?

 
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Reply: 1.1.1
From: Rolf Latham


Hi Sim

Not too much. Tends to be more of a prob for the LMI people. Understand that an interest only investment loan carries a higher risk than an owner occupier.

So the LMI people look at it like you putting a turbo on the Laser :eek:). They want to reassess the deal somtimes.

In the old days B4 Aussie Home Loans came in you had a 1 % extra rate for Ips too

Ta
Rolf
 
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Reply: 2.1
From: Dale Gatherum-Goss


Hi

No, as others have correctly pointed out, you cannot claim the interest on the loan unless the property was available to bring in an income.

However, another point to throw into your bag of tricks is that the interest not tax deductible might be used to reduce the eventual capital gain when you sell the property along with the rates and other costs. Just keep accurate records of every cent and mention this to your CPA when the time comes.

Good luck

Dale
 
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Reply: 2.1.1
From: Simon and Julie M


Hi
Something else to consider if the capital growth in the area is good,is to have the property valued at the time you rent it to establish the property's new value.
Simon
 
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Reply: 2.2
From: Owen .


"A property becomes a "rental property" the day it becomes available for rent - you do not necessarily have to have a tenant in it yet."

So does this mean if I am living in my house and constantly advertising it for rent but never getting a tenant, I can claim all property expenses?


Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Sim

Administrator
Reply: 2.2.1
From: Sim' Hampel


I think that the ATO would take a dim view of an owner occupied house that was considered "available" for rent. Why can't you get a tenant ? Are you charging too much ? Are you being too fussy ? Are you actually just trying to defraud the ATO ?

My opinion is that you would be leaving yourself wide open for a nasty visit from the taxation commissioner.

Tell you what... you try it... and if you don't get sent to prison for tax fraud, then maybe we'll look at it as an option ;-)

 
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Reply: 2.2.1.1
From: Owen .


You first....



Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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