Interest deductibility

Question from A updated on 11th April 2016:

Many years ago we purchased a property in Auckland for $350,000. With the current GV above $570,000, how can we claim tax benefits on the higher value?

Our expert Mark Withers responded:

I assume your question is focused on interest deductibility. To be deductible interest must be a result of money borrowed to buy an income earning asset. This is known as the nexus test.

The interest must be "linked" to the earning of income. The security for the debt is not directly relevant to the nexus test for deductibility.

So if you raise further finance against the new equity in the property and use it to acquire another asset that derives taxable income the interest is deductible. If you use the borrowed money to reduce a private debt or acquire a personal non income earning asset the interest is non deductible.

In simple terms, the fact that the property has risen in value does not in and of itself confer you any additional opportunity to deduct more interest. This will entirely depend on what new debt is used for.

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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