Thinking for the longer term can help property investors with their tax planning from one year to the next.
As an investor, here’s one way you may be able to claim a tax deduction.
By prepaying the interest on your investment loan now for the next 12 months you may be able to claim a tax deduction for that interest in your current year’s tax return.
When you borrow money to make an investment that will generate assessable income, you’re generally entitled to claim a tax deduction for the interest expense that arises.
In some cases the interest expense will be less than the income earned (positive gearing); in some cases it will be equal (neutral gearing); and in other circumstances the interest cost may be greater than the income return generated in that year (negative gearing).
The interest is generally deductible in the year it arises. However, if you have a geared investment portfolio in your own name, you may be able to prepay the interest expense on these loans for the next 12 months and receive your entitlement to the deduction this year.
You can choose to prepay the interest for a period of less than 12 months and still receive a deduction for the year’s tax return, but it cannot be prepaid for a period greater than 12 months.
Why would you prepay the interest?
Prepaying interest gives you the ability to bring forward the tax deduction to which you may be entitled next year into the current one. This may provide you with tax planning opportunities and advantages from one year to the next.
Additionally, by prepaying interest you are locking in the rate for the following year, and some providers offer a discounted rate when you prepay.
It’s important to remember that in order to receive these benefits you need to make the prepayment before June 30 2011.
Furthermore, once the payment is made, you cannot claw back any interest payments should the account be closed or repaid.
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