Tax Tip 90: Consolidating loans – be careful of tax issues

Consolidating loans – be careful of tax issues

It is common for people to incorporate other debts into their home loan debt. But this can have unintended consequences if the home is ever rented out.


Example

Mr X has a $180,000 loan with $20,000 available in redraw. Mr X also has a credit card debt of $20,000. Mr X naturally wants to redraw the $20k and pay the credit card off. He may be paying 22% interest on the credit card but only 4.5% interest on the home loan so it makes sense.

But before this is done he should split the loan. If he doesn't do that he will have one big loan with 2 purposes – part to fund the purchase of the home initially and part to fund the credit card which was used for private purposes. This means it is a mixed purpose loan. Furthermore any subsequent deposit into the loan will mix things up and it will be very hard to work out the portions of interest on each part.

So split before you consolidate.

 

If you split its not consolidated.

 

Perhaps my heading should have been along the liens of "refinancing other debts into the homeloan".