Shifting mortgages impact on tax
Question from Jean updated on 19th June 2017:
We want to sell one of our two rental properties and need advice about shifting mortgages between properties and tax obligations.
Mortgage one was taken out in 2009, secured against our home and rental property one. Mortgage two was taken out in 2014, secured against our home and rental properties one and two. To date we have offset interest payments for mortgage one against property one and mortgage two against property two.
Our query: If we sell property one, pay off mortgage two and shift mortgage one to property two, are the interest payments still tax deductible?
Our expert Nick Ashford responded:
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.
Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
Search the Ask an Expert archive
Browse all questions in the Ask An Expert Archive »