Tax question

[Jess Peletier]

Hi all,

I've come across a scenario where I'm uncertain of the tax implications and hope you can shed some light for me?

Property 1 PPOR owned by Uncle and Niece.
Loan split 1 - original loan, both borrowers
loan split 2 - used for IP in niece's name only.

If loan 2 has both PPOR owners names on loan, but use is for IP in nieces name only, is interest claimable -

100% by niece?
50% by niece?

I've wrestled with it but conceeded defeat

Thank you!

 

[Paul@PFI]

Tax deductions are based on how money is used NOT where loan security is etc. Lets use an example.
Buy a IP and cost is $100 and its 100% borrowed.
Later you seek extra funds and borrow against own home and $100 is borrowed to do two things; $50 to buy a car and $50 to put a new kitchen in IP.

Deductions available against the IP are the interest on the $100 (original loan) + $50 (new kitchen). The car loan is private and nothing to do with the IP.

Who claims the interest ?? The owners of the IP based on title deed.

Seems that loan 2 is for nieces IP. So only she can claim that deduction against the IP provided loan 2 was used for IP acquisition etc. It seems uncle is a guarantor ??

 

[D.T.]

Step 1 - Purpose of the loan is always the best way to tell if deductible or not.

Step 2 - Names / split on title is best way to determine who its deductible for.

Pretty easy when you think of it like that.

 

[Jess Peletier]

The loan split was borrowed in both uncle and nieces name on loan docs for the purpose of buying IP in nieces name only.

So 100% deductible to the niece?

The best way I could imagine it is similar to when you have two spouses on the loan but only one spouse on the title. in that scenario it's deductible 100% for the spouse on title.

So it boils down to this then -

It actually doesn't matter who borrows the money, if the borrowed money is used to purchase IP, the interest is deductible to the person on the IP's title.

 

[Paul@PFI]

It actually doesn't matter who borrows the money, if the borrowed money is used to purchase IP, the interest is deductible to the person on the IP's title.

Not true. If I borrowed the money I would have to lend it to the niece or she cant claim a cent. The niece must be a borrower or co-borrower.

 

[Jess Peletier]

Okay, cool - was just testing the boundaries with that one!

Niece is a co-borrower. All good then to claim 100% or will there need to be some kind of private loan arrangment btwn niece and uncle for the uncle's 50%?

 

[Paul@PFI]

No agreement needed.

 

[Jess Peletier]

Thanks Paul, and DT much appreciated!