Changing bank security costs?
Question from Rob updated on 8th January 2013:
I bought a rental in 2009 using my home as security. This was because the value of my home was greater than that of the rental and I didn't have a large deposit. After paying off some principle, I substituted security for the loan so the rental loan is now secured by the rental property. I did this partly to free up my home (allowing me to potentially use it as security for a future purchase)and to secure the loan by the relevant property. How should I treat the cost (legal and bank fees) of substituting the security? Should these be regarded as expenses associated with that rental or perhaps capitalised on the value of that property or the next property if I purchase one?
Our expert Mark Withers responded:
It seems clear that the loan in question was used to buy the income earning rental property so it has a clear nexus with income. Provided the security alteration is aligned with the same income earning process the costs of making the change should be deductible.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.