Split investment loans tax deductible

The Federal Court has ruled that interest on split mortgages for investment properties is a legitimate tax deduction. This a breakthrough for investors and also a boost for negative gearing.

Where one loan is split across two properties, the borrower’s own home and an investment property, this allows the borrower to pay off the residence quickly and defer payments on the investment property. Repayments on investment properties can be postponed until residential housing mortgages are paid off for maximum tax deductibility. Interest on the investment property mounts up but can be claimed as a tax deduction.

The ruling is a blow for the Tax Office, which issued a ruling five years ago to disallow the practice. The ruling could also affect small business owners who allow overdrafts to build up so they can use it to pay bills or for other purposes.

The ruling does not apply to 100-percent owner-occupier loans which are simply split between fixed and variable rates.