Shifting mortgages impact on tax

Our Experts Answer:

I’m going to assume that your structure has rental properties owned personally. Deductibility rules are different for companies. The key to understanding interest deductibility is the nexus test. It poses the question: was the borrowed money used to derive taxable income? Where the borrowings funded an income earning property the interest will be deductible.

The trap for investors is that this has nothing to do with the security arrangements with your bank. It is not the fact that the rental property is used as security that determines the deductibility, it is whether the loan itself was used to buy a rental property.

So, on the assumption that mortgage one was used to buy an income earning rental property, the subsequent alteration in security for the lending will not undermine its deductibility.