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Dee asks:
(updated on Thursday, August 25th 2016)
I purchased an investment property 12 months ago and paid 50% as a deposit. I have now sold an overseas property and bought a house for myself, which is also mortgaged 50%. I want to move the loan on my house to the investment property, which the bank is willing to do.
However, when I asked my accountant if I could claim on this additional mortgage on the investment property he said I couldn't as I didn't need it when I first bought the property. This seems to go against everything I have read in this forum and in books. Is he misinformed?
Our Experts Answer:
No, he is on the money so to speak. Interest deductibility has nothing at all to do with which asset secures the lending. Deductibility is determined by whether the borrowed money is used to derive an income, it is this nexus with income that is necessary for the interest to be deductible. So the interest on borrowed money that was used to buy the personal home is not deductible even if the loan is secured by the rented property.
This type of problem can potentially be addressed with a restructure that might involve sale of the rental property to an entity that borrows to buy it. This returns you your equity and enables you to repay the private home loan. Note though that the new brightline test now serves to tax any gain on a property sold within two years (even in a restructure to an associated person) if the property was purchased after 1 October 2015.
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