1 ANSWERS

1. Guest738
   

    The short answer is no, the loan is not tax deductible. This is a classic situation in which many property owners find themselves when they first decide to upgrade. Assessing whether interest on a loan is tax deductible depends on the purpose of the loan – not the collateral for the loan. In this case, the purpose of the loan is clearly to build a new home and not for the purpose of producing income. This situation is a double loss. Not only would the interest on the loan not be tax-deductible, but the rent from the investment property would be taxed at the highest marginal tax rate.
   A simple solution could be to sell the first home and put the proceeds into the new home; you would then borrow to buy a rental property, using the equity in the new home as collateral. The interest on the loan would then be tax-deductible and instead of paying tax, a tax refund would more likely result.
   However, there may be alternatives. For example, if the first home had been bought in the wife's name only, the husband could borrow the money to buy the property from his wife, and she could put the money she receives towards the new house. A legally binding contract is needed, and stamp duty must be paid, however, the tax benefits may far outweigh the transfer costs. I would recommend that you check with both your solicitor and accountant before you attempt any transaction of this nature.

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