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PPOR to IP - interest deductibility

Discussion in 'Real Estate' started by scoob, 30th Apr, 2011.

  1. scoob

    scoob New Member

    Joined:
    30th Apr, 2011
    Posts:
    2
    Location:
    Brisbane, QLD
    I'm hoping someone can give me some good news as what I've read on the internet is not looking good for my situation.

    I bought my first home 3.5 years ago. My name is the only one on the title but my parents initially helped me by loaning me the money. I never had an official mortgage on the property.

    A year or so later my boyfriend moved into the unit with me and we have been living together ever since. We have entered into a contract to buy a home together in both our names 50:50. I will not sell the unit as I want to use it as an investment property and I thought that if I was to get a mortgage on the unit then I could write of the interest expense against any rental income. The plan is to rent out the unit right away.

    However from what I have read it does not look like I will be able to deduct the interest expense from the rental revenue; and that in order to do this I would have to sell the unit and by another one with a mortgage on the initial purchase. This just doesn't seem fair!?

    Could someone please advise if this is true and if so is there any reasonable way around this?

    Thanks
     
  2. samaka

    samaka Well-Known Member

    Joined:
    30th Sep, 2007
    Posts:
    308
    Location:
    Sydney
    You can do it. As long as you aren't extending your initial mortgage to cover the 2 properties. Make sure your new house has a completely separate mortgage. The day you have tenants start paying you rent, you can start claiming the interest.
     
  3. scoob

    scoob New Member

    Joined:
    30th Apr, 2011
    Posts:
    2
    Location:
    Brisbane, QLD
    Thanks samaka, but I don't have an initial mortgage as this money was loaned to me by my parents as they had extra cash available.
    Will this matter?
     
  4. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney
    Since your parents loan you money you have a loan. This loan could be refinanced with a bank and the money released used to pay for the new property (in full or part).

    The interest on the existing property should be deductible once the property becomes a rental. The interest on any extra borrowed in the refinance wouldn't be deductible unless it was borrowed for the investment property.

    However, I think the problem you may have is convincing the ATO that there was a loan initially from your parents. Th flow of the money may be easy enough to establish, but do you have proof it was a loan and not a gift?