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Tax Tips – Maximising Property Deductions by Claiming Borrowing Expenses

23 Jul 2010. Categories: Tax Tips by admin 12 Comments

So far this year our accountants have picked up on a costly tax deduction many of our new clients have been missing out on regarding borrowing expenses on their investments. Particularly those who have paid mortgage insurance on an investment property purchase or who have refinanced from one investment loan to another.

Firstly it’s important to understand what borrowing expenses are:

Stamp duty charged on the mortgage
Loan establishment fees
Title search fees
Mortgage broker fees
Valuation fees
Lenders mortgage insurance fees

Initial borrowing expenses aren’t 100% tax deductible in the first year. They are deductible over 5 years. What our accountants are finding is that most new clients have either claimed all these costs over 1 year, which is incorrect or they had no idea they could claim this at all and have missed out on some pretty big deductions.

We’ll explain using a real life example:

Joe purchased an investment property for $600,000 which settled on the 1^st August 2008. He put in a 5% ($30,000)deposit and borrowed the rest, which was the remaining 95% ($570,000). The cost of mortgage insurance, application fees, government registration fees etc on his loan set up were $22,157.

After interviewing Joe and looking at his previous year’s tax return we noticed that his previous accountant hadn’t claimed any borrowing expense.

So here’s how it works. The borrowing expense is deductible over 5 years. So the easiest way to do it is to divide the borrowing expense by 5. That will give you $4,431 that is claimable every year.

Borrowing expense trap 1: Because the property didn’t settle on the 1^st July 2008, it settled on the 1^st August 2008 we can pro rata the year Joe missed by the number of days left in that financial year, which means Joe could only claim approximately 92% of the 1^st years $4,431 – which comes to $4,055. The remaining $376 can be claimed in year 6. So we’ve amended Joe’s previous year’s tax return to include the $4,055 tax deduction he missed in his last tax return and included a $4,431 borrowing expense deduction in his current year’s tax return.

Borrowing expense trap 2: Let’s say Joe wanted to refinance. He would obviously pay some break costs. So in his following tax return he would be able to claim that expense, plus the remaining unclaimed borrowing expenses not already claimed as a lump sum in his tax return for that year.

If you want more information about borrowing expenses relating to your investment property, don’t hesitate to give us a call on 1300 399 829 or click here to ask us a question.

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