Tax Q&A: Your Tax Questions On PPOR And CGT, Answered
Q: I have a question about my investment property and bank loans.
I have been living in my principal place of residence, a unit, for the last 14 years. Last year I started to look for a house and found one that I wanted to make my future place of residence.
I took out an investment loan to buy the house and was intending to rent it out for a few years until I was ready to move in, but after settlement and having seen the house empty, I changed my mind and moved into the house straight away.
I then decided to sell the unit. After selling the unit, I had enough money to pay for the house outright. However, I was advised not to pay it off and to leave the money in an off set account, so it is sitting in the off set account linked to the house I now live in.
My question is: if I use this money that is in the off set linked to the house to buy an investment property, will the ATO view this as me using the money to buy an investment property, and will I get full tax advantages (ie negative gearing) when using this money?
A: At present, you have your cash deposited in your bank account that is also linked to an offset account. This arrangement is perfectly fine and it also allows you to pay less interest on your home loan. You may call this an investment loan; however, it is not an investment loan, and as long as you are not claiming any of the interest expense on the loan as an income tax deduction, this is all perfectly fine.
If you now wish to use your cash to purchase an investment property, the benefit and impact of the offset account will be minimised, due to the lower amount of cash that you would now have in your bank account. This would also mean that the interest expense on your existing mortgage/home loan would increase as well.
Where income tax deductibility on your current mortgage/home loan is concerned, you will not be eligible to claim the interest expense on the loan as an income tax deduction because the purpose of the current mortgage/loan was to fund your new principal place of residence.
Even though your original intention was to purchase the property as an investment property, the fact remains that this was not an investment property, therefore there was a change of intention. This means the current loan is not tax deductible.
The income tax deductibility of the interest expense on a mortgage/home loan all comes down to the original purpose of the loan, irrespective of what security you offer the lender in order to secure the loan.
If you obtain a loan to purchase an income-producing asset (such as property, shares, a business, etc), then the interest on the loan is tax deductible. This loan may be secured, for example, by your principal place of residence. But it all comes down to the purpose of the loan.
If you use your money from your offset account to purchase an investment property, you will not be obtaining a loan and therefore no tax deductibility on loan interest will exist. If you obtain a loan to purchase your investment property, then the interest on that loan may be tax deductible.
– Angelo Panagopoulos
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