Refinanced LMI as Tax deduction

[sam.baba]

Hi, I and my wife currently own an IP, and the home loan for it is with NAB, which is on a fixed Interest only payment at a 6.04% Interest until December 15th 2012. We bought this Property back in March 2010 and we lived in that Property for 15 months, last year September 2011 due to my work relocation we moved to different location and we are currently renting a property.

Due to both of us working full time now, we are planning to buy another property and move into it. When I spoke to my mortgage broker who initially helped me purchased our first home, he suggested that we refinance our existing home loan and use our existing property’s equity to purchase the next house. He also mentioned that in case if we are liable for a LMI, this could be put in towards the IP property and claimed as a borrowing expense. Is this possible? And if this possible what will happen to the initial borrowing expenses that I am still claiming over 5 year period? Do I simply add a 1 year proportion of the new LMI and borrowing cost to this existing borrowing expense I am claiming as tax deduction?

Any advise would be helpful.

Thanks.

 

[Peter_Tersteeg]

If the LMI is necessary for the refinance which enables you to purchase the investment property, it is certainly a very good argument that the LMI can be written off as a capital expense.

Just make sure that the loans are not cross-collateralised. Aside from generally being bad, it would also mean that any LMI payable would be amplified to more than necessary.

*Edit* Opps, the LMI appears to be for the purchase of a PPOR, which is not a deductable purpose. It would be tax deductable if you were purchasing an IP instead of your own home.

 

[tobe]

I dont think the LMI is claimable. the purpose of the loan, and the LMI is to purchase a property that you are going to live in, therefore its not claimable. If the purpose of the loan was to rent out the property, then it would be claimable.

 

[sam.baba]

Thanks Peter

Thank you Peter for pointing out the Cross Collateralization of the loans.

 

[sam.baba]

Thanks Tobe, will try to get some more clarification from my broker.

 

[Peter_Tersteeg]

My appologies, I misread the original post and got it backwards. Tobe is correct, as you're purchasing your own home, the LMI incurred would be for a non-deductable purpose, hence it would not be tax deductable.

 

[Terry_w]

Don't take tax advice from a broker.

If the LMI is incurred in relation to the production of assessable income then it may be deductible. But, you are refinancing to increase the loan for private purposes. Part of the refinance will relate to the investment property loan so part of the LMI could be deductible.

Borrowing expenses are claimable over 5 years or the life of the loan if shorter. So if you discharge the loan you could claim any remaining LMI and other borrowing costs in one hit and then any new borrowing costs could be claimed over 5 years - assuming deductible.

 

[DaveM]

Don't take tax advice from a broker.

What about advice from a broker who is also a lawyer and tax agent? Or is that a triple no-no-no?

 

[tobe]

Don't take tax advice from a broker.

If the LMI is incurred in relation to the production of assessable income then it may be deductible. But, you are refinancing to increase the loan for private purposes. Part of the refinance will relate to the investment property loan so part of the LMI could be deductible.

Borrowing expenses are claimable over 5 years or the life of the loan if shorter. So if you discharge the loan you could claim any remaining LMI and other borrowing costs in one hit and then any new borrowing costs could be claimed over 5 years - assuming deductible.

Can only registered accountants post on this part of the forum? If I removed mortgage broker from my description would that help? Would it help if I put a little disclaimer at the bottom of every post? I use this forum for its shared knowledge, from both proffessionals but mostly from people with direct personal experience. Happily most posters here are both. I find it very imformative.

By the way, which part of the refinance LMI could be claimable? Under what sort of circumstances, given the purpose of the refinance is to purchase a PPOR, wouldnt none of the LMI be claimable?
""Part of the refinance will relate to the investment property loan so part of the LMI could be deductible.""

 

[Terry_w]

Sorry Tobe, I wasn't referring to you, but to the original poster's broker. I think it is ok for anyone to post on the forum.

With the loan being refinanced part of the loan would relate to the original purchase of the property. If this loan is refinanced then the interest would be deductible once the property becomes an investment. If there is LMI on the loan then part of the LMI would relate to the original loan and therefore part could be claimable.

 

[Peter_Tersteeg]

With the loan being refinanced part of the loan would relate to the original purchase of the property. If this loan is refinanced then the interest would be deductible once the property becomes an investment. If there is LMI on the loan then part of the LMI would relate to the original loan and therefore part could be claimable.

Obviously people need to get tax advice from an accountant. Whilst brokers generally aren't qualified to give tax advice, it's also fair to say that we see enough scenarios to at least give some basic advice to be confirmed with the individuals accountant. It's probably naive of me to assume that people on this forum are intelligent to apply that principal to the information they receive here regardless of the qualifications of the poster.



My perception in this scenario would be that the purpose of refinancing would be to give the borrower the abilitly to purchase another property. If they didn't want to purchase that property they wouldn't be refinancing, therefore they might not incur LMI.

Hence surely it would follow that the purpose of the LMI would be applied to the same purpose of the increase in funding?

Or would this perhaps argument might apply if a refinance didn't occur, but instead the existing loan had another loan (for purchasing the next property) put beside it?

 

[Terry_w]

What about advice from a broker who is also a lawyer and tax agent? Or is that a triple no-no-no?

Such a person, if they did exist, would have to make sure they are clearly distinguishing their roles. As a broker they could not give legal advice, but if acting as a solicitor under proper licensing and insurance they could advice on legal issues.

 

[tobe]

Sorry Tobe, I wasn't referring to you, but to the original poster's broker. I think it is ok for anyone to post on the forum.

With the loan being refinanced part of the loan would relate to the original purchase of the property. If this loan is refinanced then the interest would be deductible once the property becomes an investment. If there is LMI on the loan then part of the LMI would relate to the original loan and therefore part could be claimable.

Fair enough. I do always make large qualifications and disclaimers (we have to under legislation) giving my opinion and personal experience on tax matters when speaking to clients directly.

So in terms of the LMI deductability, none of the 'new' LMI is claimable, but if there was previously LMI paid and capitalised to the original loan, this would continue to be deductable?

 

[Rolf Latham]

The real question behind all the distraction is that if at all possible, the new equity loan on the existing property should be processed with the same lender.

That way the "small" lmi premium for the new separate NON deductible loan will be non deductible BUT the larger chunk previously paid will still be "depreciable " against the income from the IP

Id call the brokers cards on that one and raise them 2 : ).

There may be a logical reason to have to refi the lot, but make sure its for YOUR reasons, not the lenders / brokers


ta
rolf

 

[dan c]

Can only registered accountants post on this part of the forum? If I removed mortgage broker from my description would that help? Would it help if I put a little disclaimer at the bottom of every post? I use this forum for its shared knowledge, from both proffessionals but mostly from people with direct personal experience. Happily most posters here are both.

You're right Tobe, the forum is a shared knowledge resource.

However lately there has been some mis information, particularly from a certain broker (present company excluded!) posting in the 'Tax' section, with no disclaimer or the usual 'check with your accountant' at the bottom of the post.

As us accountants have to fix up the mess from incorrect advice, we get a bit touchy about non-helpful advice.

 

[dan c]

So in terms of the LMI deductability, none of the 'new' LMI is claimable, but if there was previously LMI paid and capitalised to the original loan, this would continue to be deductable?

Yes, as long as the original property is still a rental property.

 

[Peter_Tersteeg]

My perception in this scenario would be that the purpose of refinancing would be to give the borrower the abilitly to purchase another property. If they didn't want to purchase that property they wouldn't be refinancing, therefore they might not incur LMI.

Hence surely it would follow that the purpose of the LMI would be applied to the same purpose of the increase in funding?

Or would this perhaps argument might apply if a refinance didn't occur, but instead the existing loan had another loan (for purchasing the next property) put beside it?

As us accountants have to fix up the mess from incorrect advice, we get a bit touchy about non-helpful advice.

Dan do you have any comments on my 'opinion' above?

I'm assuming the original loan was taken out at 80% LVR, then an equity access for another 10% (which would incur LMI on the full borrowed amout). Given the equity access is what triggered LMI and the purpose was for the purchase of another property, wouldn't the LMI be deductable in a manner consistant with the purpose of the new property purchase even though it was charged over the entire loan?

I feel your pain on unqualified advice. It's painful when a client says their accountant/solicitor/parent/hairdresser told them it was okay, therefore the bank should lend them the money.

 

[Terry_w]

Dan do you have any comments on my 'opinion' above?

I'm assuming the original loan was taken out at 80% LVR, then an equity access for another 10% (which would incur LMI on the full borrowed amout). Given the equity access is what triggered LMI and the purpose was for the purchase of another property, wouldn't the LMI be deductable in a manner consistant with the purpose of the new property purchase even though it was charged over the entire loan?

I feel your pain on unqualified advice. It's painful when a client says their accountant/solicitor/parent/hairdresser told them it was okay, therefore the bank should lend them the money.

I think there are 2 ways to argue this.

eg. $100,000 loan on an investment property, existing.
then another $50,000 is borrowed and the loan is refinanced to a different lender at the same time. $50,000 was used for deposit on a private residence.

1. Loan was refinanced for the release of the $50k so any LMI incurred would be a private expense.

or

2. The total loan is $150,000 with investment portion 2/3 and private portion 1/3. Any LMI involved with the refinance could therefore be attributed to the investment 2/3 and private 1/3.

--

If the lender was not changed and the loan was just increased by $50k then it would appear the LMI incurred on this would only be a private expense.

Does refinancing the lot at the same time change this?

 

[Rob G.]

The existing asset that the loan is secured against is the IP (ex PPOR).

The equity you are trying to access is that of the IP.

You want to use this equity for a private purpose.

You are trying to argue that your private borrowing capacity has been compromised by the fact that you have an existing investment loan scured by the asset.

You are using the 'but for' argument. But for the existing loan, I could draw on the equity without LMI referable to the existing IP loan.

This argument is not usually decisive.

Even more so given that the asset was initially acquired as a PPOR (private purpose).

Time for a pbr methinks.

Cheers,

Rob

 

[Aaron_C]

Such a person, if they did exist, would have to make sure they are clearly distinguishing their roles. As a broker they could not give legal advice, but if acting as a solicitor under proper licensing and insurance they could advice on legal issues.

Happens all the time - plenty of accountants have broker accreditation for the odd-loan that they write. It's easy to say you should 'distinguish' between a tax-agent and broker capacity but in reality the line is much more blurred than that (although I am sure you know that already).