Little Loan Problem

5 May 2017

 LITTLE LOAN PROBLEM

At the moment we seem to be seeing more and more investors with loans in the wrong entity.  For example, the Company owns an investment property, but the loan is in the personal name.
 
In a worst case scenario, this could lead to the interest not being deductible.  In most cases, it leads to more work being required and creates a greater chance of an error or this issue being missed. 
 
With the example above, the individuals have borrowed money.  If this money is used to gain income, then the interest is deductible.  So we would normally claim the interest in the personal name, and then charge the Company the same interest.  Ideally the Company would pay the individual interest, and then the individual would pay the bank.  The Company would then be allowed the interest deduction if this money was used to buy the investment property.
 
Sound complicated?  I suggest taking this opportunity to just double check whether your loans are in the right entity.  And, if necessary, to discuss them with me and your mortgage broker to get them right.
 
Another common example can be that the borrowing is in a Trust, but the investment property is in a Company.  From my last newsletter (Can You Better Protect Yourself? - 1 May 2017),  this can also create an asset protection issue!
 
I’m excited to be doing the T42 off road marathon tomorrow, and hope you have a less painful weekend planned.

Kind regards
Ross Barnett