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Increasing investment property mortgage to minimise loan on new home purchase

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Jen | 19 May 2013, 10:08 PM Agree 0
Hi, we are buying a new (more expensive) home, having just sold our current home, and we were considering increasing the mortgage on our rental property in order to minimise the amount we need to borrow for this new home. We were hoping we would be able to claim the extra interest on the investment unit as a tax deduction. However it has been suggested to us by an accountant that tax law might prohibit us from claiming the extra interest. Keen to get a second opinion. Any advice?
  • David M | 23 May 2013, 01:06 PM Agree 0
    You can only claim a tax deduction for funds borrowed to derive an income. So your Acct is right - as the extra funds will be for your home you live in - no tax deductibility. What you could do is restructure your loans so you don't pay the interest on the investment loan - and let this accumulate, and direct the money you would have paid to your home loan. This is called "debt recycling". Over time - your home loan will come down and your tax deductible investment loan will go up. Make sure you are comfortable with it and speak to your Acct and mortgage broker.
  • Eos Property | 28 May 2013, 08:57 PM Agree 0
    Hi Jen,

    Unfortunately you will not be able to increase the borrowings on your investment property and direct these funds towards your new home. The Steele case established that the purpose of your borrowings is a big factor when determining whether or not your interest is deductible.

    The ATO recently determined that the process David refers to as 'debt recycling' (capitalising interest) is also outside the tax guidelines and will reject claims made for interest incurred this way.

    Your accountant is right.
  • EB | 21 Feb 2014, 04:27 PM Agree 0
    Hi, I have a similar question relating to purpose of funds and tax deductibility.
    Firstly if I redraw on my personal mortgage to complete the purchase of an investment property, is that portion of interest tax deductible?
    Secondly, say later down the road I revalue my investment property and increase borrowing to pay back the amount I redraw from my personal mortgage, is this interest tax deductible?
    Spoke to my accountant and he said yes to both. Need to get a second opinion.
    Thank you.
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