Property tax tips- When are interest expenses deductible ?
Generally interest is deductible if it is incurred when the borrowed money is used for income producing purposes. If the borrowed money is used for some or all private purposes then the interest on the private portion is non deductible.
For example, if you borrowed $300,000 from the bank and $200,000 was put into a property investment to generate income and the other $100,000 to purchase a home to live in, then 2/3rds of the interest would be deductible (being $200,000 / $300,000).
This is referred to as the “use” test or “tracing” test which generally means that:
(a) When borrowed money is used solely to purchase investment property then the interest will be deductible (while the property is rented or available for rent)
(b) Where borrowed money is partly used for investment purposes and partly for private purposes, the interest will be deductible to the extent it is used for investment purposes.
Many people believe that if they use an investment property as security for a loan than the interest on that loan is tax deductible regardless of what the money is used for. This can be a costly mistake. The deductibility of interest has nothing to do to with the security used to borrow the funds. You can use your own house, a car or a boat or anything. What matters is what the borrowed funds are used for. Read on for more Property Tax tips.