Loan use determines deductibility
Question from Tiri updated on 28th November 2012:
Hubby and I have built and moved into a new house and rented the old one. Bank loans are cross secured with as much as possible put against the old home before the second property came into the equation. We're about 40% equity. When we asked how the loans are split, the bank said they just see it all as one now. Do we need to go and separate the loans to put the maximum amount of interest paid against the rental. Or do we need to get a LTC to do this?
Our expert Mark Withers responded:
The deductibility of interest is not determined by the security for the borrowings but rather the use to which the borrowed money was put. This means that any money you borrowed against your old home to buy or build the new townhouse will give rise to non-deductible interest. The problem is normally solved by forming a company which may elect for LTC status that would borrow the money to buy your old home that is to become the rental. With the proceeds you get from selling your old home to the company you would reduce the borrowings that were taken out to the new home.
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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