Most investors and business owners are aware that the interest paid on an investment loan is generally tax deductible. These deductions can be maximised by prepaying the interest on the loan.
To do this simply contact your financial institution and arrange to have all of the interest costs for the following financial year brought forward and paid during the current year. You may then claim these costs as a tax deduction in the current financial year.
The advantages could be considerable as the following example shows:
Phillip earns an annual salary of $75,000 and owns a rental property that generates an additional income of $23,400 each year. Phillip currently owes $320,000 on the property, with an interest rate of 4.5% per year on the loan. Assuming no other tax deductions, the impact of prepaying interest on Phillip’s assessable income is as follows:
Salary income $75,000
Rental income $23,400
Gross income $98,400
Prepaid interest ($320,000 at 4.5%pa) $14,400
Assessable income $84,000
Tax on gross income $26,323
Tax on assessable income $20,707
Tax saving due to prepaying interest $ 5,616
Prepaying the interest on your investment can bring forward your tax deductions this financial year. It may also enable you to fix the rate on your loan for 12 months and in so doing, attract an interest rate discount.
Your financial adviser can provide guidance on how to maximise your tax deductions. Don’t leave it until next June – start planning now.
Calculation assumptions: rent $450/week not including repair/maintenance costs; tax calculated on gross income not allowing for salary sacrificing or other deductions and includes Medicare levy.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.