Query about Investment Property - Tax Implications

curious101 on 27/07/2020 - 00:23
Last edited 27/07/2020 - 00:23

Hello Bargainers,

I recently purchased a property, which needs significant renovation (around 30K) before it is tenant ready. The loan is through UBank and they are saying that their valuation will be based on purchase price and now I am wondering to switch to another bank, get market valuation (instead of my purchase price), so I can release some equity to renovate the property.

From tax side of things, is it better to get loan from the bank to renovate the property (continuous tax deduction on interest paid) or is it better for me to pay the renovation costs directly (capital gain/loss).

I am trying to see whether it would be worth the hassle to switch banks. Please let me know if there are any other aspects that I might be overlooking.

Thanks for taking out time to read and comment.

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Comments

  • MrHyde on 27/07/2020 - 06:21
    +3

    First thing, is your property even eligible for tax deductions as based on what you said it is not on the market for tenants

  • Amaris on 27/07/2020 - 06:51

    Where’s the smartass who goes “what did your accountant say”?

    • Downvoter on 27/07/2020 - 07:11

      Same fvckwits that write “bikies” probably

    • JimmyF on 27/07/2020 - 08:49
      +2

      Well it is solid advice and I know who I would rather trust. Some stranger on the internet or my accountant…. Hmmmmm

      • Amaris on 27/07/2020 - 19:15

        It’s usually not about trusting explicitly. It’s about getting an idea of what other people have done (and what their accountants have told them)!
        At the very least, the OP can use those leads/ opinions to have an informed conversation with their own accountant

  • May4th on 27/07/2020 - 07:21
    +2

    you cannot claim deduction for interest on loan for renovations if it is reno ie. improvement and not repair. you can however offset this against capital gains down the track. have you contacted ubank to see if they can topup your loan and revalue it post-reno? that may be your easiest way to access potential equity

    • Alyone on 27/07/2020 - 08:35

      Except that you can. https://www.ato.gov.au/general/property/residential-rental-p…

      In Interest Expenses, it has the following statement:
      finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)

      Noting the "intend to rent out" which is relevant to the OP in this case.

    • curious101 on 27/07/2020 - 12:23

      Thanks for the idea.

  • cauilfield on 27/07/2020 - 08:09
    +2

    This is Not a maintenance But rather a capital improvement

  • nicolemcmilllon on 27/07/2020 - 08:36
    +3

    There is no tax deduction for either way you do it because the rental property won't be "available for rent" at the time of the reno and it is a capital improvement not a repair.

    If you use the bank's money then you will have to apportion the interest for the life of the loan (which is a headache). Part of the interest will be deductible as normal, the other part that relates to the reno won't be. Instead it will be included in the cost base of the property when you sell it.

    Other than having to apportion the interest there is no difference with using your money or the banks.

    The usual scenario is "can I do more with that money than I lose in interest to the bank if I use theirs".

    Cheers
    Nicole :)

    • curious101 on 27/07/2020 - 12:22

      Thank you so much Nicole, I am grateful.

    • Love a bargain on 27/07/2020 - 15:00

      This is so wrong. Interest on the capital cost is as much a deductible expense as interest on the purchase price (which is also a capital cost).

    • JetLi on 27/07/2020 - 22:46
      -1

      Wrong, no need to apportion for the life of loan.

  • Some Guy on 27/07/2020 - 13:54

    Howcome you have equity in a property you just bought? Did it's value soar?

    • curious101 on 27/07/2020 - 15:10

      Bought the property at a concession due to the renovation costs. Now trying to get valuation for after renovation valuation.

      • miwahni on 27/07/2020 - 22:47
        +1

        If you're after an on-completion valuation you'll have to provide your plans and tender to the bank, which will control release of funds to the builder. Do you have these things in place? Otherwise wherever you go they're likely to rely on purchase price if the purchase has only recently settled and your LVR is 80% or under.

        • curious101 on 28/07/2020 - 03:42

          Much appreciated insight, thank you.

  • JetLi on 27/07/2020 - 22:46

    There's no need to apportion the interest on the loan, all funds are used on the rental property.

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