tax deduction question on LOC

I have an interesting tax deduction question which needs clarification.

I have a property in St Kilda that was my PPOR. I used its equity of $290k to create a Line Of Credit to purchase another house that I rented out for a period of time. I have the title to the IP and it has no connection to the LOC. I have now moved into my IP and call it my PPOR.

The debt in the LOC includes the payout of my old mortgage on St Kilda of $25k the cost to buy my IP of $167k and a new car for $25k - total debt of $217k is against the ST Kilda property. My question is - If I rent St Kilda out what amount of monies can I claim as debt against the property? I have some people telling me the entire amount of the LOC that is outstanding = $217k while others say only the old mortgage value of $25k????

This is further confused by the scenario of - if I have the St Kilda property revalued to a greater amount and increase the value of my LOC is there any connection anymore with my old mortgage amount of $25k or is the actual overall debt against the property the figure to use.

Who has a clue to this one?

Hiya TK

You seem to be able to split the amounts into what appears to be personal and business, so why not structure your loans to reflect that ?

Inmy non sepcialist view, only the ORGINAL retained debt against new IP is deductible.



It is only the $25k, I am afraid. The rest of the funds were used to buy non income producing assets and the trail will reveal this should the tax office care to look.


Hi Trevor,

Unfortunately the horse has well and truly bolted, as Rolf and Dale have stated, $25k is the remaining deductible debt.

The best thing you can do now is protect this deductible loan from any further dilution until you pay off the non-deductible debt. Unfortunately if you leave things the way they are, with few exceptions any repayment of principal of the LOC (ie amts > min mthly payment) will need to be apportioned between the various ded. and non-ded. loan components of the LOC to determine the new balances of these components (that's bad news for your $25k).

Best way to circumvent this uneccesary dilution of your deductible debt is to refinance the LOC to a LOC with 3 sub-accounts. With due regard to the recent uncertainty regarding split loans and the continuing litigation in Hart's case, if your thinking of capitalising interest on the $25k amount, less riskier strategy from a tax viewpoint may be 3 separate LOC's
If my understanding of everything that has been written on these forums is correct, I agree that $25K will be the tax deductible debt.

Gets back to "the purpose of the loan, not the security used to secure it".