Interest Deductions on Rental Properties and Lines of Credit

Nick Moustacas, a highly respected property tax specialist, took time to share a recent case study with the Reno Kings and made sure to pass on an important warning to all property investors ...

The following case illustrates the importance of separating your investment loans from your private funds.

Strategy: Deposit all of your salary in to a line of credit to save interest.

Result: Some interest on Investment property loan is disallowed based on private drawdowns.

WARNING!!!
DO NOT COMBINE PRIVATE transactions WITH INVESTMENT LOAN FACILITIES.

CASE: Domjan v FC of T

The AAT (Administrative Appeals Tribunal) has held that not all of the loan interest incurred by a taxpayer on a joint facility used to finance three rental properties was deductible. In particular, the interest relating to funds drawn down from the loan facility and used for private purposes was not deductible.

Interest on drawdown funds

The taxpayer and her husband made private deposits, consisting of a gift from the taxpayer's mother and the husband's retrenchment payout, and also made 10 "private" drawdowns from the loan facility.

The taxpayer argued that in redrawing the funds, she was merely accessing her own private funds. However, the Commissioner considered that the amounts redrawn constituted a new borrowing in accordance with Taxation Ruling TR 2000/2.

The AAT found that the redraws amounted to new advances. Accordingly, the interest incurred on the drawdowns used for private purposes was not deductible.

NOTE:
If you are depositing your salary and wage income directly into a Loan or Line of Credit that is used predominantly for investment purposes you should seek immediate advice from a qualified accountant.

If you redraw those funds for private expenditure the interest may no longer be 100% tax deductible.

You can meet and learn much more from Nick Moustacas by attending the Reno Kings Property to the Max workshop.  For more information click here.