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Joint Loan and Tax Deductions on Interest Repayments

Discussion in 'Accounting, Tax & Legal' started by Wuldfasche, 29th Mar, 2008.

  1. Wuldfasche

    Wuldfasche Member

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    I am wondering what happens when claiming a tax deduction on the interest on an investment property loan when the loan is under three peoples names.
    Two of the people are retired (my parents) and have tax free incomes. The third person (me) is working and would obviously like to be able to claim the full tax deduction on the interest for this investment proprty.

    Many thanks.

    Wuldfasche.
     
  2. Billv

    Billv Getting there

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    I am not an accountant but it would seem to me that you can only claim 1/3 of the total interest.
    You are equally responsible for the loan but ownership you have 33.33% each don't you?
    Cheers
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Actually it's not the names on the loan which determine deductibility - it's the names on the title.

    Who actually owns the property ?
     
  4. Rob G.

    Rob G. Well-Known Member

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    NET INCOME/LOSS

    Generally, co-owners share of net income or loss from a rental property is based on legal interest TR 93/32.

    Joint Tenants - equal shares presumed.

    Tenants in comon - based on their legal percentage on the title.

    BUT where you can clearly demonstrate that equitable interest is different from their legal interest then the ATO will accept this ( I will avoid going into detail here ).


    LOAN DEDUCTIBILITY

    Interest is deductible where the use of the borrowed funds can be traced to an assessable income producing purpose TR 2004/4.

    If your parents have merely been added as names on the loan because of bank requirements (i.e. a defacto guarantor) then you could claim that the loan is purely yours, and they have no deductions.

    This would be the case if they did not actually participate in any ownership or borrowing.

    OR they may have contributed their own money without borrowing - e.g. perhaps they are joint owners with you but without having borrowed for their share.


    SOOOOO ...

    1) Did your parents put any money into the investment - and why ?

    2) Did your parents borrow that money ?

    The ATO will firstly presume income interests based on names on the title and deductibility based on names on the loan where they coincide with legal ownership.

    If you wish to argue an alternative, then consider facts such as the size of the loan in relation to the value pf property, who pays the interest, rates, maintenance and who gets the receipts.

    Usually co-owners will draw up a contract to clarify these issues, along with their other ownership rights.

    I think you should contact your Accountant or Legal Advisor to check up on your particular facts.

    Cheers,

    Rob
     
  5. Wuldfasche

    Wuldfasche Member

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    My parents gave me the deposit for the loan and they did not borrow any of the money, It came directly from their savings. They also paid the stamp duty on the property. I beleive they were only on the loan contract as a bank preference.

    The title to the property is only under my name.

    Also, what would happen if i was unable to make a repayment myself and my parents deposited money into my account to enable me to make the repayment.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Doesn't matter where you get the money from - it's what it is used for that determines the deductibility. If the property is in your name - the loan interest is fully deductible by you, and you must also declare any income (and capital gains when sold) in your own tax returns.

    Naturally, you should check this with your accountant/tax advisor.
     
  7. Rob G.

    Rob G. Well-Known Member

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    Yep ...

    If you are the legal owner, and all the borrowed money was used to acquire the IP then you declare all income & claim all expenses.

    Incidentally, it is usually better if your parents act as guarantor as they would have better rights ... maybe the subject of another thread as to how banks craftily create their contracts to your detriment !!!

    Cheers,

    Rob
     
  8. Wuldfasche

    Wuldfasche Member

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    Well what a relief.. i was worried i was stuffed for a while there.

    Thanks everyone for your help.