21 June 2012

Rental property

Pre Paying Interest

Paying your interest in advance can have more than one benefit for investment loans. The ability to pre-pay interest is appealing to property investors, rather than owner-occupiers, because only investors may be able to claim a tax deduction for interest payments on their loan as well as other costs.

By paying 12 months interest in advance, investors may be able to claim the deduction this financial year, rather than wait 12 months for the tax benefit.

But the ability to pre-pay interest is ideally only suited to individuals with the cash flow to take advantage of the offer, not just this year but each year for the term of the loan.

Twelve months' interest on a $250,000 loan would amount to $18,850. This is a significant amount of cash to have on hand and while the full amount may be tax deductible, the amount you get back is determined by your marginal rate. Hence, someone on the top rate of 45.0 per cent who paid $18,850 interest in advance and claimed it as a tax deduction would get back $8,482.50 through the tax system but still pay out $10,367.50.

Investors need to ask themselves if the strategy will be ongoing and for how long. If you think rates are likely to go up in the next 12 months and you know you will have the ability to pre-pay interest on an annual basis for a number of years, it may pay to fix your rate for longer.

Borrowers may be able to make arrangements with their lender to have the loan drawn down in time to allow pre-payment of interest by June 30.

What expenses you can claim

If you own an investment property, you may be able to claim a tax deduction for a raft of expenses in addition to the interest on your loan.

The Australian Taxation Office advise on their website that you can claim expenses relating to your rental property but only for the period your property was rented or available for rent - for example, advertised for rent. A very handy ATO guide is "Rental Properties Guide" available on their website.

Some expenses (it is advisable to seek professional advice for a more comprehensive list available to you) for which you may be entitled to an immediate deduction in the income year you incur the expense could include:

  • Advertising for tenants

  • Bank charges

  • Body corporate fees and charges

  • Insurance

    • Building

    • Contents

    • Public liability

  • Legal expenses (excluding acquisition costs and borrowing costs)

  • Mortgage discharge expenses

  • Pest control

  • Property agents fees and commissions

  • Water charges

Please note that you can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.

Expenses for which you cannot claim

Expenses for which you are not able to claim deductions include:

  • Acquisition and disposal costs of property

  • Expenses not actually incurred by you, such as water or electricity charges borne by your tenants

  • Expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year.

As always we recommend you seek financial advice in regard to the information contained in this newsletter to see if it is appropriate for your circumstances.

Best regards

Iain Pepper

Your "lender of first choice"


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Iain Pepper
Head of Lending

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e  ipepper@latrobefinancial.com.au

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