My husband and I bought a rental property a few years ago and are currently paying off the mortgage. We recently refinanced the mortgage and drew down some additional money to buy a new car. Can we still claim a deduction for the interest we pay on the mortgage?
Good question. The Australian Taxation Office (ATO) has of late been focusing their audit work on the tax deductions claimed in relation to rental properties.
This is because they have seen quite an increase in amounts being claimed by property investors in recent years.
So, now more than ever it is important that you make sure you get it right when calculating your tax deductions.
When you take out a loan for an investment, such as a mortgage for a rental property, you may only claim a deduction for 100 per cent of the interest you pay on the loan if the entire loan is used for the investment.
However, once you use part of the loan for private purposes, such as buying a car, then you can only claim a deduction for the interest that relates to the investment i.e. the rental property.
Therefore, you need to calculate what percentage of the loan relates to the rental property and what percentage relates to the car.
For example, say your mortgage for your investment property was originally for $200,000.
Having paid off $100,000 over the last few years, its balance is now $100,000.
If, when you refinanced the mortgage, you drew another $50,000 to buy your new car, this takes your total amount borrowed to $150,000. So even though the mortgage is still less than the original amount you borrowed, one third of the loan is considered private, being $50,000 of the total of $150,000.
This means that you can only deduct two thirds of the total interest charged each year.
Therefore if the interest on the loan was $7500 for the year, you could claim $5000 as a tax deduction against your rental income.
As I mentioned above, the ATO has been focusing on rental property deductions, so if you have any questions about interest deductibility, you should contact your accountant or business advisor.
If you would like more information on this topic or have another tax related question e-mail me at firstname.lastname@example.org.
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