ONE of the most asked questions concerns tax deductibility of interest on home loans. It is common for homeowners to work hard at repaying their mortgage and then decide to move to a more expensive home, keeping the original as a rental.
There is a general belief that, if you borrow against the original property to buy a new one, the interest on that loan will be tax deductible.
Unfortunately, for anybody contemplating this strategy, the tax laws don't work like that. The deductibility of interest depends on the purpose for which the loan is taken out, not the asset mortgaged.
Obviously, the interest on a loan to buy your own residence cannot be tax deductible, as the loan has been taken out for a private purpose.
A much better option for anybody who intends to retain their original home and move to a new one, is to have an offset account attached to their home loan. Then, instead of reducing the mortgage, any surplus funds can be placed in the offset account.
There is no additional cost, because any interest earned on the offset account is deducted from the housing loan.
In the future, when they decide to buy the new home, the funds in the offset account will be available for the house deposit, leaving a large loan on the original property. The interest on this loan will be tax deductible once it becomes available for rent.
Noel Whittaker is a co-founder of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org