interest

Question

We have two properties that were bought in my wife’s and sister in law’s names as tenants in common 50/50. I being the higher income earner stayed out of it as the intent was to build and sell short term. Building has taken a little longer than anticipated and we might hold on a while before selling. CGT may not be as significant as gearing losses due to interest. Though my name is not on the deeds I am an official borrower.I can get my name on the deed as a 1 % owner for a small cost. Is there any strategy that would allow me to apportion a greater portion of the interest deductions to me. We do have a few other properties , but as they are managed by real estate agents, I do not believe the business angle would be applicable.
I also have an investment only cash loan, that I use to co contribute to the cost of buying and paying investment property loan interest. It is used 100 % for investment properties only. My understanding is that the interest on this loan is deductable. please confirm.

Thanks
JD

Answer

JD

Your first problem is if your wife and sister in law purchased the land to build houses to sell then they need to be registered for and charge GST. Further CGT does not apply because the profit will be normal business income.

Of course this means that they can claim back the GST on the building costs but while the properties are used as rentals you will have to pay the GST back to the ATO. When you sell the properties and charge GST you will be able to claim back the GST input credits on the building costs back again but not all of them. You will need to add together the total rent you received for the houses and the selling price. Then work out the percentage the selling price is of this total. Apply this percentage to the total GST input credits to get the amount they are entitled to claim back when you sell.

The wonderful salary sacrifice arrangement that would have allowed you to claim all of the interest even though you only owned 1% of the property was squashed in the May 2008 budget so now putting your name 1% on the deed will only mean you can claim 1% of the loss.

Deducting interest on money borrowed to pay interest is fine as long as it is not a scheme with the dominant purpose of a tax benefit and you are certainly not required to use your other income to prop up the investment properties. My only concern here is keeping things tidy, make sure, if you are the one claiming the interest, it is on borrowings in relation to properties held in your name.