Can I claim Interest deduction on my own home?

Interest on a loan that was used to buy your home is not deductible as it is private in nature. However, if your house starts earning rental income, the interest will be deductible from the point your home becomes income producing.
For example, if you move overseas for few years and rent the house in while your’re out of the country.

Can I claim Interest deduction before any rental income is derived?

Yes. If you fully intend to rent a property out, interest and other expenses will still be deductible even if no rent is received.
The tax office takes into consideration the time you might take for renovations or when you look for tenants.

What else can you claim?

You can claim the interest charged on the loan you used to:
- Purchase a depreciating asset (Such as Air-condition) for the rental property.
- Finance renovations and repairs on the rental property such as roof repairs.
- Purchase land on which to build a rental property.

What can’t you claim?

As motioned above you can’t claim interest on any private expanse such as money used for a car loan or when the home hasn’t been bought to produce income

What records do you need to keep?

You need to keep records of all Interest expenses in order to make a claim. You have to keep them for up to five years from the date your tax return is lodged.

1. Joint tenants
Joint tenants can only hold property in equal shares 50-50. Upon the death of a joint tenant the share passes to the other joint tenant automatically. Therefore the most popular use of “Joint tenants” is in a marriage situation. Profits or losses from rental properties must be shared as well. In addition Joint tenants can’t sell off their share of the property without the permission of the other joint tenant

2. Tenants in common.
Tenants in common each have an identifiable interest in the property, Their shares can be unequal (60-40 for example). The most important factor however is that your shares are protected in the proportions you designate. Unlike Joint tenants, You can decide who will receive your share upon death by stating it in your will.

What should you choose?
We prefer tenants in common as you have more control in a case of a dispute, divorce or death. It also does not make any sense to hold as joint tenants in equal shares if the contributions of the parties are not the same.
In any case, it is important to note that if you choose one holding over the other it is possible to change the holding to the other form.

Tax Planning
You have to think twice before getting into co-ownership, as you will have to split the loss, no matter what the situation is for each partner. If one partner, for example, is in very high tax bracket and the other is not, you will still have to split the losses, therefore not gaining the benefit of claiming the loss on the high tax bracket partner.

It is important to note that the tax office draws a distinction between Running expenses and Occupancy expenses. It is easier to claim running costs on your tax return and only in limited circumstances a deduction may also be allowable for occupancy expenses such as rent and mortgage interest.

1. Running Expanses relate to the use of facilities within the home. These include electricity charges for heating, cooling, lighting, cleaning, depreciation, and the cost of repairs on items of furniture and furnishings in the office.
2. Occupancy expenses relate to ownership or use of a home which are not affected by the taxpayer’s income earning activities These include rent, mortgage interest, water, municipal and and house insurance premiums.

Claiming Home Office Expanses – Running Expanses

You will be able to claim a portion of your running costs such as gas and electricity, or alternatively the tax office allows you to claim a deduction calculated at the rate of 26 cents per hour.
You will also be able to claim other home office expenses, such as telephone, mobile and internet expenses, plus a decline in value of computers, furniture or other equipment. They will have to be calculated separately

Example of home office claim (Portion of Cost)

Gas & Electricity Bills - $1000 a year * 15% = $150 (15% is the ratio worked on business)
50% Depreciation on Computer = $300 (50% of the computer is used for private use)
50%

Example of home office claim (% of Total hours)

26 Cents * 10 hours per week * 52 = $132.5
50% Depreciation on Computer = $300 (50% of the computer is used for private use)

* A deduction is allowable only where additional running costs are incurred by a taxpayer because of income producing activities. Also, the income producing use of the home office needs to be substantial and not merely incidental.

* If home office equipment, such as a computer is used only partly for work or business purposes, then the decline in value deduction is reduced by an amount that reasonably reflects the extent that equipment was not used for income producing purposes

* A deduction is allowable for the cost of telephone calls made in the course of work or business

* Individual taxpayers who claim home office expenses are required to be able to prove that they have incurred such expenses

Claiming Home Office Expanses – Occupancy Expanses

Only in limited circumstances a deduction may also be allowable for occupancy expenses such as rent and mortgage interest. They can be made if your home is used as a “Place of business”.

What is a place of business?
- The area is clearly identifiable as a place of business;
- The area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
- The area is used exclusively or almost exclusively for carrying on a business;
- Or the area is used regularly for visits of clients or customers.

Which expenses can be claimed?

In addition to running costs you will be able to claim

Rent (Apartment, house, etc)
Interest on your mortgage
Council and water rates
Home insurance premiums

Example of home office claim - Occupancy Expanses

Rent - $10000 a year * 30% = $3000 (30% is the floor area used for business)

* In most cases, the apportionment of the total expense incurred on a floor area basis is the right method for claiming calculation.

* Where an area of the home is a place of business for only part of the year, it may be necessary for expenses to be apportioned not only on a floor area but also on time basis.

* The ATO allows a deduction for non-capital expenditure on repairs to premises, for the purpose of producing assessable income.