Ask Noel
We've lost an income, so must reduce our investment property loan repayments. The broker recommended a line of credit for our $439,000 loan. It is now down to $371,500 and the rate is 6.29 per cent - we pay $5000, which we'll now need to halve. We don't plan to purchase other properties at this stage. Is this the best loan for us?
I think your existing arrangement is fine because it gives you maximum flexibility. Just make sure you at least cover the interest, if at all possible. This would be $1950 a month.
I have an investment property that is rented at the moment, and have a town planning permit to build three townhouses on the land. If I demolish the existing house, and build two - one to rent and one to live in - can I claim the interest on the investment loan for the period of the construction, while I don't receive any income from the property?
Based on the decision in Steele's case you can claim two-thirds of the interest - one-third of the development will be for private purposes. Keep your accountant closely involved and stay focused on doing the development for rental purposes.
Is it really worthwhile claiming property depreciation to maximise tax deductions? You go to a lot of expense and trouble for a quantity surveyor to check and record every depreciable item to reduce tax, and when you sell the property the tax office will claim back all those deductions. I sold my investment apartment after 10 years of renting and negative gearing, without any capital appreciation, and the tax office took back all 10 years' depreciation when I sold it - I lost money. Property seminar organisers never tell the real story.
A property depreciation report is a once-only expense, costs about $550, and is fully tax deductible. I think it is a great investment, particularly as it almost certainly highlights a range of tax deductions you would never think of yourself and also saves on accounting fees. I agree that many of the deductions are clawed back when you sell, but often this occurs after you retire when you are in a much lower tax bracket.
My husband and I purchased a block of land three years ago, with an intention to build. We have now decided to sell it as we have not been able to sell our current property. We read the advice you recently gave to another couple in a similar situation and wondered if we could claim back the interest, rates etc we have paid while holding onto the block. If we sell our current home and then sell the land will the same apply?
Provided the property was bought after August 20, 1991, you can claim expenditure such as rates, maintenance and interest. The timing of the sale of your home is not relevant.
We recently received a phone call from a Gold Coast-based company trying to talk us into going through them to build an investment property on a block of land they claim is located in a growth area. They say we can save stamp duty by using a building contract instead of buying a completed house and also claim we can pay off their house loan faster by letting the interest on the investment loan capitalise while we use all the income from the new property to pay off our home loan. What are your views?
I would be extremely wary of any organisation that calls about investment, especially if they are based on the Gold Coast. This practice has come to the notice of ASIC as well as the Office of Fair Trading and there are moves afoot to change the regulation to give better protection to investors. The Tax Office has also made a statement that they do not approve of interest being capitalised and have announced their intention to take action against investors who are doing it.
The explainer
Guarantor role could provide best benefits
Our son intends to study at uni in the city. What would be the best strategy for us with regards to accommodation for him? Should we look at paying rent for him in a shared unit or house, or is it worthwhile buying a two-bedroom unit close to uni and paying his half of the rent using an interest-only loan?
I believe property should be purchased on its merits and not simply because you are trying to provide accommodation for a family member. However, if you can find a bargain-priced unit you could talk to your bank and go guarantor so your son could buy the unit in his own name. He would then become eligible for the first home owner's grant and reduced stamp duty if applicable. This would prevent a capital gains tax liability if you bought the unit with him as a joint owner and then wanted to transfer your share to him in the future.
Frequently Asked Questions about this Article…
A line of credit can be a sensible choice because it provides maximum flexibility when your income has fallen. The article says your existing arrangement is fine — but try to at least cover the interest if possible. For your loan, that would be about $1,950 a month. Flexibility is useful if you don’t plan to buy more properties right now.
Based on the Steele decision referenced in the article, you can claim two‑thirds of the interest on the investment loan during construction if one‑third of the development will be for private use. Keep your accountant closely involved and make sure the development is clearly done for rental purposes to support the deduction.
Yes — a property depreciation report is presented as a good, cost‑effective investment. It’s a once‑only expense costing about $550 and is fully tax deductible. The report often identifies deductions you wouldn’t think of and can reduce accounting fees. Be aware many deductions can be clawed back when you sell, but that often happens after retirement when you may be in a lower tax bracket.
If the land was purchased after 20 August 1991, you can claim expenditure such as council rates, maintenance and interest while holding the block. According to the article, the timing of when you sell your home is not relevant to claiming those holding costs on the land.
No — be extremely wary. The article warns about organisations (notably some Gold Coast callers) offering stamp duty savings via building contracts and proposing that you capitalise interest to speed up paying off your home loan. ASIC and state fair trading bodies have noted these practices, and the Tax Office has said it does not approve interest capitalisation and may take action against investors using it.
No. The Tax Office does not approve the practice of capitalising interest in this way and has announced its intention to take action against investors who are doing it. The article recommends avoiding schemes that rely on interest being capitalised.
Property should be bought on its merits rather than solely to house a family member. If you find a bargain unit, a sensible option could be to act as guarantor so your child buys the unit in their own name. This can make them eligible for first home owner grants and reduced stamp duty (if applicable) and avoids creating future capital gains tax issues that can arise if you buy jointly and later transfer your share.
Benefits: acting as guarantor can help your son qualify to buy in his own name, potentially giving access to first home owner grants and reduced stamp duty and preventing a future CGT liability if ownership stays with him. Risks: you should only do this for a property that stacks up financially — don’t buy solely to provide accommodation — and be aware of the usual mortgage and guarantor responsibilities. Discuss the idea with your bank and get independent advice.
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