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New investor question on tax

Discussion in 'Investing Strategies' started by Ben45, 21st Mar, 2010.

  1. Ben45

    Ben45 New Member

    Joined:
    21st Mar, 2010
    Posts:
    4
    Location:
    parramatta, nsw
    Hi, I'm fairly new to investing and new to this site, but I was wondering if someone could answer this about tax deductible interest.
    The bank approved a home equity loan against my owner occupied property for 100K. I took the 100K and put it in a margin loan account to buy 200K worth of shares, so can I claim a tax deduction on the entire 200K borrowed?
    Also lets say in the future I need to reduce the gearing ratio by selling some shares, and leaving all the funds from sale in the margin account, will this affect tax deductibility of the borrowed funds?

    Thanks,

    Ben
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Since the $100K borrowed against the house and the $100K in the mmargin loan are both used for investment purposes, then yes, the interest on both loans will be deductible (but not any other amount owing on the house beyond the $100K used for this investment).

    If you sell some of the investment and use the proceeds to pay down part of either loan, the interest on the remainder of the loan continues to be deductible provided it it still being used for the purposes of investment. Shouldn't be a problem there.

    Was there a reason you weren't sure about this? There are some situations you can get yourself into difficulty with deducting interest on loans - especially where there is a mixed (personal and investment) use of the borrowed funds. If you keep all investment borrowing and personal borrowing completely separate (ie separate loan facilities if possible), you'll usually avoid most of these problems.
     
  3. Ben45

    Ben45 New Member

    Joined:
    21st Mar, 2010
    Posts:
    4
    Location:
    parramatta, nsw
    Hi Sim, thanks for your response.
    I was fairly sure about this, just wanted to find out for sure. I've kept my personal borrowings separate from business ones.
    But something else I needed to ask is this. When I got the home equity loan approved I paid 5K LMI which was capitalised onto the loan. Is it true that I can only claim for the interest on the 100K part of the loan, not the LMI included. And do I still deduct the LMI over 5 years as you do if you pay it up front.

    Thanks, Ben