Cost on interest for progress payments of a new investment property Tax deductible??

rmamila on 01/05/2014 - 16:28

I am considering buying an investment property as I've been paying a hefty tax for past decade but never had any way to claim a single cent back from my tax as I am doing a job. I am not getting any Gov benefits either. So I am now thinking of doing something about it and going to go with the most common way of doing it by investing on a house in addition to my current mortgage.

I am thinking of building a new one with a home and land package. The package I am looking at is different from most other home and land packages where you pay a deposit and then settle the rest at the completion. I have to pay 5% on land and 10% on the house now and the land will be released early next year. Once the land is released I have to pay the rest for the land. Months before the land gets titled the builder starts charging the progressive payments. So this will end up with big money on interest as I have to pay all this by drawing from my mortgage for my own house.
When I calculated the compound interest for next 18 months, it's very significant amount. As I am buying this for purely on business/investment purpose can I show the interest as an expense for my tax purposes?

One of my friend said the rule is different for investment properties than the normal businesses and we can't claim the interest until we start generating any income from the property. Which means this interest money will just be a buried cost for me on this investment and never be able to show as a cost or will never realise unless the property keeps growing in this rapid rate for ever.

Are there any Tax/Finance specialists here who knows about this rule with ATO?

Financial

Comments

  • Shadowsfury on 01/05/2014 - 19:53
    +2

    You need to see a professional.

    But my (limited) understanding from university/CA I think means your friend is right - interest cannot be claimed until it is producing assessable income, however you MIGHT (again, see a profesisonal) be able to capitalise the interest so that it forms part of your cost base.

    Off topic: Don't buy a property to negatively gear just for the sake of sticking it to the ATO - to be negatively geared means you're guaranteed to be losing money NOW in the HOPE of making money in the future - not always the soundest investment strategy.

  • ShannonIngram on 01/05/2014 - 20:27

    I would certainly agree that you need to see a professional. However my understanding is that the non deductablity of interest during construction is a myth and that you can in fact claim it in certain circumstances.

    See http://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR20044/NAT/… for more details but do talk this case over with your accountant and confirm it will apply to what you are looking to do - you may want to get a private ruling from the ATO to be sure as it is a bit non standard in terms of time frames and that you won't continuously be drawing down on a construction loan until much later.

    • rmamila on 02/05/2014 - 11:57

      The question is where can you find positive gearing properties from day one? I've been looking for a while and couldn't find any around Melbourne other than NRAS which are tiny very basic apartments but the price is highly inflated by the builder/agent to pocket out any benefit upfront, which you have to recover over 10 years. At the end of the 10 years you'll end up with very bad investment burden. That's when I gave up NRAS, I couldn't find an agent who was selling them at the market value or close to the market value.

  • z1ngerburger on 01/05/2014 - 23:51

    If you are paying tax, it means that you are making profit/money. As Shadowsfury has said, it's not logical to do something JUST for the tax benefit.

    I'll put it in another way.

    If you have say $30,000 in deductible interest (ie. you paid $30,000 in interest to the bank) and you're on the highest marginal tax rate, that mean's that you will be paying 45 cents in the dollar to the ATO for every extra dollar you earn. You are still out of pocket $16,500 ($30,000 - $13,500 {the portion that would have been paid to the tax man had you not have the loan}).

  • ShannonIngram on 02/05/2014 - 10:37

    People seem to forget that you can have a negatively geared but cash flow positive property. Works well with newer properties with lots of depreciation and also with schemes like NRAS if you find the right property. I'm a big advocate for positively geared investment property (making a profit is never a bad thing!) but there are still circumstances where negative gearing can work very well.

  • rmamila on 02/05/2014 - 11:00

    I understand what you say. I've been thinking the same way for past 6 years when I could buy a property with close to 700-800 a month negative gearing. So I ended up not buying anything for so long. Then I started looking in the same area recently and realized I can't even think of affording the same area and same size of properties anymore. The reason is that my income only grew in 2% on average for past so many years but everything else including properties go up in far higher rate. 2 years back my wife started working thinking that we can improve a bit. However it doesn't seem to happen as it took 70-80% of her salary for day care even after the 50% rebate for two kids and her car. The only other thing it did was to move us completely out from any Centrelink benefits. I kept whinging about it as centrelink only consider before tax income and that's not something we can take home. The after tax income is not big and after paying the mortgage, bills and day care we are no better than before she started her job. We kept thinking and arguing whether she should continue working or stop working and have less stress and still have the same money to live.

    Every time day care increase fees I am one of the very few who has to pay full fee in that day care and all other wealthy business people pay less than me as they all seem to get the Centrelink benefits. When I see the fee schedule sheet
    and argue about the way they charge and increase the fees the only thing the owner repeat is that I seem to have higher before tax income and as a result I get no benefits. Every time I have this discussion with someone they say that's why Government has given a way to reduce the taxable income and build something for future. After thinking further I thought it would be ok to go a bit out of pocket and cut down from expenses to fund for a mortgage for investment property and see if it helps in future. Not working to reduce the tax should not be the solution. Do you think it's bad if you have 500-600 a month out of pocket for an investment property is bad? Looking at the past 10 years when I kept missing the boat I don't think so. But the question is would it be same for next 10 years.

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