Claiming tax on rental interest

Question from Callum updated on 12th September 2018:

Nearly two years ago we purchased a new home which we moved into and decided to keep and rent out our existing home we have owned for over 10 years.

When we purchased our second house we refinanced and set up a revolving credit facility, so effectively one big mortgage, with both homes under our own names. We have five different accounts (suffixes) under our one lender (including day to day accounts) and have two of these five accounts fixed. One is for the lion share of the rental debt, the other for our family home debt.

My question is - can we claim tax on the interest paid to the full current valuation of the rental? IE: The rental is worth approximately $450,000, we currently have $380,000 in a fixed term borrowed, but also have a floating portion of $70,000 which "floats" over both properties.


Our expert Mark Withers responded:

No. You must conduct a track and trace exercise to determine exactly what interest is charged on the original debt that existed that funded the acquisition of the home you are now renting. This is made more problematic having lumped everything into a line of credit facility as this often further destroys deductibility. The interest on the debt that was used to buy the new home you are living in is not deductible.

This situation could have been structured properly at the time if you had restructured the ownership of the original home that became a rental into a new entity that borrowed to buy it, thereby freeing up your equity to reduce the debt on the new home purchase. It may still be possible to address this but you will re start the five year bright line count on the restructured property and this government is set to ring fence rental losses from 2019. That means there are many issues now to weigh up.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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