Interest rates are at historic lows and many property investors are searching for a better deal on their mortgage. When weighing up the costs and benefits of refinancing, investors need to be aware of what refinance costs are tax deductible on rental property to boost their cash flow.
In this article, we will answer the following:
- Are refinance costs tax deductible?
- How are costs deducted?
- Why investors choose to refinance
- Some costs are considered capital and will impact capital gains tax
Are refinance costs tax deductible on rental property?
Refinancing a mortgage is when a property owner replaces their existing loan with a new one. Unlike owner-occupier homeowners, property investors can benefit from many refinance costs tax deductions. Some of the fees an investor can expect to claim are:
- loan establishment fees such as the application fee
- early discharge fees
- fixed rate loan break fees
- any title search fees charged by your lender
- valuation fees charged by your lender
- mortgage broker fees
- lenders mortgage insurance billed to the borrower
The average cost of refinancing fees can change, so it’s always a good idea to discuss these with your lender to get a full picture.
How are the costs deducted?
If the total refinancing fees are more than $100, they can be claimed over a five year period or the term of the loan, whichever is earlier.
When an investor uses part of their refinanced mortgage for private purposes, all deductions must be apportioned. For example, if 30 per cent of their rental’s refinanced mortgage was used to purchase a new private residence, all deductions for the borrowing costs and ongoing interest expenses need to be apportioned.
Why property investors choose to refinance their mortgage
A property investor’s new mortgage could be with a different or the same lender. Deciding whether to refinance is a significant decision that should only be based on your own circumstances.
There are many reasons why an investor would decide to refinance their mortgage, such as to get a lower interest rate, shorter terms, reduced fees or changing their mortgage rate from a fixed to an adjustable rate.
Some costs are considered capital and will impact capital gains tax
Any capital costs that an investor incurs from refinancing aren’t tax deductible and instead form a part of the property’s cost base. Capital costs can include conveyancing fees, building and pest inspection fees, valuation fees when a private valuation is done by your solicitor and if applicable, stamp duty on the transfer of property.
The capital costs an investor may need to pay when refinancing their home can decrease the amount of payable Capital Gains Tax (CGT) when selling the property. We recommend speaking with your accountant to make sure all capital costs are included.
For more information about how BMT Tax Depreciation works closely with your accountant to maximise your return, request a quote or contact our specialist team on 1300 728 726.