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Interest deductible on increased equity portion of home (with offset account)

Discussion in 'Accounting, Tax & Legal' started by stellsnic, 31st Oct, 2012.

  1. stellsnic

    stellsnic New Member

    Joined:
    31st Oct, 2012
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    Location:
    Melbourne, VIC
    Hi there,

    I lived in my property for 2 years, which was financed by a loan attached to an offset account. The initial loan amount was $400k. I then purchased a new home to live in, and rented out the one I was living in. At the time I purchased my new home to live in, I had $100k sitting in the offset account. The balance of the loan was down to $300k, so effectively, I had a net loan amount of $200k. I never made any additional repayments to the loan, nor did I redraw anything from it. I used the offset for redraw and additional deposits (as you normally would). When I purchased the new house, the bank used the money in the offset account, plus equity in the house I was living in. So effectively, I was able to increase the initial loan amount to $500k. The question I have is - is the interest on the full $500k fully tax deductible, since I am now renting out that property which I lived in, and since I had an offset account (so I never repaid any additional or redrew any amounts from the original loan amount). The part I am confused about is whether the interest on the equity portion is tax deductible as well (that is, the difference between the initial loan amount of $400k, and the market value of the house which had increased to $500k)

    Could someone please help me
    Thanks
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    No, it is the purpose of the borrowed funds which determine the deductibility of interest - the increase in the original loan was to fund your new PPOR, so it is not deductible.

    Do you actually have two loans (the original loan plus the equity loan) ? Or is it a single facility secured by both properties (cross-collateralised) ?

    Are you paying P&I on the loan(s) or just IO?
     
  3. Terryw

    Terryw Well-Known Member

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    Location:
    Sydney
    I agree.

    The interest on the full $500,000 isn't deductible.
    You say your loan was initially $400,000 and then balance was down to $200,000 but you also say you did not pay anything off it. Please clarify.

    Whatever the lowest loan balance on the loan itself was, this will be the deductible portion. You would then have to work out the % portions relating to investment and private use and use this % to work out deductible interest.

    (this is assuming no deposits and withdrawals).
     
  4. stellsnic

    stellsnic New Member

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    31st Oct, 2012
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    Location:
    Melbourne, VIC
    Hi Sim,
    the bank structured it so there is now one investment loan 100% secured against the IP. it is an interest only repayment loan. it is not a cross collateralised loan. the original property increased in value to $500k which is why we were able to increase the original loan. my understanding was if we had the offset account and we never make additional repayments we were protected from ato denying us interest deductions
     
  5. stellsnic

    stellsnic New Member

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    31st Oct, 2012
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    Location:
    Melbourne, VIC
    Hi Terry W,

    The loan was initially $400k, I meant we paid principal and interest repayment, which is why it went down to $200k, but any additional repayment we kept in the offset account (which was $100k) instead of putting it onto the loan. So we should be able to claim the interest up to $400k, however, I am not sure if we can claim the additional interest on $100k to increase the loan to $500k?
     
  6. Terryw

    Terryw Well-Known Member

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    Location:
    Sydney

    If your loan went down to $200,000 then you could only claim the interest on $200,000.

    You seem to have taken money out again = new borrowings. Where or how this money was used will determine deductibility and it seems to have gone towards the purchase of a new private residence so no deductions for this part.