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Purpose of Funds
Wednesday, October 07, 2009
Many property owners get caught when they decide to buy an investment property or upgrade residences with the tax deductibility of funds.
The situation occurs when they have paid off a portion of their main residence and decide to upgrade and retain the previous home. Their rationale is that they would then like to turn their first home into an investment property and use the second home as their main residence. They think that all they have to do is ‘move’ the debt from their new home back onto the first home. This would make the first one negatively geared and put all the equity into their new home.
Unfortunately the Tax Department will not allow this to happen. It comes down to the “purpose of the borrowings.”
In the example, the purpose of borrowing is to buy a new residence for the buyer. The funds are therefore for the purpose of buying an owner occupied residence. The result is that the buyer has a large owner occupier debt on their new home and large equity in their investment or original home.
We would probably recommend they sell their first home, pay down their owner occupied mortgage and then if they still wish to buy an investment, they use their new home as collateral and this will allow them to borrow to buy another investment.
The purpose of these funds are for investment and therefore will be fully tax deductible.
Talk to your accountant or financial adviser.
- Alan Bourke