Rental property becoming residence

Question

I can find a lot of articles on the situation where a person turns their current home into a rental after purchasing a new property resulting in the loan being non tax deductable.

Our situation is the opposite. We want to move into our rental and make our current home the new rental – so swap basically living arrangements and swap the asset securing the loan over but we won’t change the actual loans, amount etc at all. We have a loan facility for purchasing the rental that we are moving into. Its a bigger house and we purchased it at a really good price hence we are keen to live in it now we need a bigger home. I understand the purpose of the loan determines whether its tax deductable or not. I want to swap the security over as on our current home we have a couple of smaller personal facilities that we need to keep personal. That way we can still hopefully claim interest on the current rental loan we already have, it would obviously be secured by our original house if we swap living arrangements though.
Can we do this? Does ‘purpose of the loan’ extend to the particular asset it was used to purchase? I should mention the rental loans and private loans have never been mixed.

Answer

That is what the purpose of the loan is all about. For the interest to be tax deductible there has to be a clear nexus between the drawing of the money out of the loan account and the purchase of the asset that is now producing income. It does not matter at all where the loan is secured. Simply look at the first page of the loan statement and see what the draw down was used to buy. If the house that amount purchased, is now producing income then the interest is tax deductible.
Once you move you will not be able to continue to “claim interest on the current rental loan we already have” this is because that loan was used to buy the bigger house which will no longer be used to produce income.
I am please that the loans have never been mixed but you should also check that there has never been any pay downs and then redraws on the loan for your original home. If you have paid anything off this loan that is it, less is now owed for the house but still the loan interest would be fully tax deductible against the rent the original home earns. The trouble starts when you redraw back out the amount you have paid in advance. This is a new borrowing for whatever purpose you spend that redrawn money on.

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