Working capital deductability

Hello all

I am wondering if anyone can help with some general advice regarding our situation. My question is in two parts so feel free to address either or both. All input appreciated.

Situation: My wife recently purchased a place (July) that we have been undertaking renovations on - absolutely necessary as the place was in a state of significant disrepair and the council had issued substantial requisitions. Total purchase price and costs were borrowed.

In addition, I have purchased a block of land and am in the process of moving a house on it - the loan for this exercise was made up of the purchase of the land, purchase costs and working capital to complete. Actual figures are land cost $110k - borrowings $210k. The working capital and land borrowings are secured against complete portfolio (properties in both mine and my wife's name - complete cross-collateralisation). The loan is in joint names.

The renovations on the place in my wife's name have, to date, been funded out of our own private capital - but there is a significant amount more work to be done to complete.

Now that you're all asleep, here's the questions:

1. If we use part of the funds loaned for the removal house for work on my wife's property, is it deductable (note that it is an investment property). I assume so given the purpose but my issue is more to do with the names on titles and loans etc.

2. Since we have expended our own private capital on my wife's place for renovations, if we obtained a loan to do renovations, and used part of it to repay our private working capital, would that part be deductable?

Regards

Laurie Shaw
 
Originally posted by lauries

1. If we use part of the funds loaned for the removal house for work on my wife's property, is it deductable (note that it is an investment property). I assume so given the purpose but my issue is more to do with the names on titles and loans etc.

2. Since we have expended our own private capital on my wife's place for renovations, if we obtained a loan to do renovations, and used part of it to repay our private working capital, would that part be deductable?
Regards
Laurie Shaw

Hiya Laurie

In theory, you should charge your wife interest on the funds that you effectiveluy loan to her to complete the renovation. She can claim interest that she pays to you, and, you will declare interest income that is offset by the interest that you pay to the bank.

Yes, interest on a loan used to undertake renovations to an IP is tax deductible.

Have fun and good luck with the rest of the process.

Dale
 
Hey Dale

Thanks for your reply - I was fairly sure this was the case. Just wanted to clarify on Q2 though.

For example - the renovation cost for my wife's place is probably in the region of 60k, if we had borrowed those costs upfront there would be no issue with being able to claim the interest expense. We never intended to conduct this scale of work but with the introduction of new laws to do with budget accommodation (just introduced), we must upgrade.

We have tipped about 30k of our own money so far into the place and I guess the question is if we were to borrow 60k (complete cost of reno), use 30k to complete and repaid 30k, is the interest cost on the whole amount deductable? If so, this would be a significant chunk we can use to pay down PPOR. If not, no real problem as rents and value increases mean a reasonable return on capital employed - just not as leveraged as I would like.

Once again, like everyone here, I really appreciate your contributions and advice. And congrats on the latest acquisition.

BTW are you going to do a replacement Brisbane tour ?

Regards

Laurie
 
Hiya Laurie

Thanks for your kindness. Yes, the whole interest is tax deductible because the intention of the borrowing is to generate an (increased) income.

Not sure abt the Qld visit. I know that I have offered to come up for the MSN group after Melb invited me to chat,and I am just waiting to see if they have enough interest. Hopefully, the answer is yes.

See ya soon and have fun

Dale
 
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