Tax treatment of early loan payout fees

Question

Hi Julia

Noel Whittaker suggested I contact you.

My husband and I bought an investment property in Toowoomba, Feb 2008. Interest rates on way up, so took out fixed P&I loan at 8.29% over 4 years. F/nightly repayments of $725. Loan balance now $183K. Tenanted at $220 per week till July 2009 (tenant often in arrears). Considering selling or re-financing. Either way bank advise @$20K economic cost early pay out fee applies. Decision to sell or keep depends on ATO treatment of loan pay out fee. Want to know we are not just handing over $20K to a bank if no tax or other benefit for us.
Please advise, if we sell is the full $20K able to be deducted from profit made (if any) to reduce the amount of tax payable? If we keep the house and re-finance, percentage rate @3% lower, but new loan would need to include the $20k i.e. $203K. Can any of the $20K be claimed in this situation? Does the property need to continue to be rented out for a claim to be made? Hope this makes sense.

Appreciate your feedback

Kind regards
Lauren Mellifont

Answer

Lauren,

Certainly the break costs to refinance the loan would be tax deductible because they would reduce future expenses on the rental property. For this reason it is better that you refinance while it is tenanted and before you make any decision to sell the property. The whole $20k will be deductible against your rental income in the year you incur it. The interest on the money you borrow to finance the $20k will also be deductible but only while the property is used to produce income.