Question on tax deductibility...please advise!

[noviceInvestor]

Hi,

I need some advice from someone in the know re taxation rules on investment properties. Of course, I am only seeking opinions here, I am not actually going to base my decisions solely on what I read here

1. I bought my first IP for $500K (took loan from bank "1")
2. The buying costs (initial deposit, lawyers fees etc.) were $50K
3. I took out a line of credit or "Equity Access Loan" against my home, which I mostly own ("small" mortgage), from bank "2".
4. I withdrew the required 50K from my equity access loan to pay for (2) above

Now, at the end of the first financial year:
5. Interest paid to Bank 1 on the $500K was $35K
6. Interest paid to Bank 2 on the $50K was $3.5K

Now, it is a well established fact that I can claim 35+3.5=$38.5K as a tax deduction.

However, I did not pay the $35K (point 5 above) from my own income, I borrowed it from the equity access loan (each monthly payment). As a result, the amount borrowed from the equity access loan became = 50+35= $85K, and interest payable on this $85K was approx $6K.

So my question is - which one of these am I legally allowed to claim:
(A). 35K + 6K = $41K or
(B). 35K + 3.5K = $38.5K?


Thanks for your advice!

 

[Terryw]

Hi,

I need some advice from someone in the know re taxation rules on investment properties. Of course, I am only seeking opinions here, I am not actually going to base my decisions solely on what I read here

1. I bought my first IP for $500K (took loan from bank "1")
2. The buying costs (initial deposit, lawyers fees etc.) were $50K
3. I took out a line of credit or "Equity Access Loan" against my home, which I mostly own ("small" mortgage), from bank "2".
4. I withdrew the required 50K from my equity access loan to pay for (2) above

Now, at the end of the first financial year:
5. Interest paid to Bank 1 on the $500K was $35K
6. Interest paid to Bank 2 on the $50K was $3.5K

Now, it is a well established fact that I can claim 35+3.5=$38.5K as a tax deduction.

However, I did not pay the $35K (point 5 above) from my own income, I borrowed it from the equity access loan (each monthly payment). As a result, the amount borrowed from the equity access loan became = 50+35= $85K, and interest payable on this $85K was approx $6K.

So my question is - which one of these am I legally allowed to claim:
(A). 35K + 6K = $41K or
(B). 35K + 3.5K = $38.5K?


Thanks for your advice!

Normally this would be claimable in full. But the ATO are looking at schemes designed to increase tax deductions and can deny the deduction if the dominant purpose was to claim a deduction.

What is the reason you did this? (ps to enable you to pay off your home loan sooner doesn't seem to cut it anymore).