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Tax Information :
Individuals :
Different Scenarios on Deduction
of Home Loan Interest
| Scenario
1: |
Sole-owned dwelling exclusively used
as residence throughout the year |
Facts
Mr A wholly owns a dwelling which is exclusively used as his place
of residence. The dwelling was acquired 3 years ago, financed by
a mortgage loan from a bank which is repayable by monthly instalments
on the 5th day of each month over a 15-year period. During the year
ended 31.3.2008, the total interest paid out of the 12 instalments
( the last one being paid on 5.3.2008 ) amounts to $120,000. He
claims the deduction for home loan interest for the year of assessment
2007/08.
Decision
For the year of assessment 2007/08, a deduction limited to $100,000
is allowed ---- sections 26E(1) and 26E(2)(a)(i)(A) and 26E(2)(a)(ii).
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|
|
Mortgage loan interest paid during
construction period |
Facts
On 1.9.2006, Mr A purchased from the developer a property which
was under construction. On 1.11.2006, he borrowed a mortgage loan
from a bank to pay for part of the purchase
price. The loan is repayable by monthly instalments for 10 years
from 1.12.2006 onwards.
The property was ready for occupation on 1.4.2007. Mr A used it
as his place of residence from the same day onwards. He claims a
deduction for the interest paid in the amount of $30,000 in 2006/07
and $120,000 in 2007/08.
Decision
No deduction can be allowed in 2006/07. Although the property in
question is a dwelling, it was not yet used as Mr A's place of residence
in 2006/07. On the other hand, the interest limited to $100,000
paid in 2007/08 is deductible ---- sections 26E(1) and 26E(2)(a)(ii).
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| Scenario
3: |
Dwelling partly for owner's residence
and partly let |
Facts
Same facts as in Scenario 1 except that Mr
A let half of the dwelling to a tenant for rental income throughout
2007/08.
Decision
It is considered reasonable in the circumstances of the case to
allow a deduction equal to half of the interest paid or the maximum
allowable deduction ( $100,000 for 2007/08 ), whichever is the lower.
Thus, in this case, $60,000 is allowed to Mr A. The other half of
the interest paid of $60,000 might be claimed for deduction under
personal assessment ---- section 26E(2)(a)(i)(B).
Facts
Same facts as in Scenario 1 except that Mr
A disposed of the dwelling in question on 1.10.2007 and thereupon
fully repaid the balance of the mortgage loan. He then lives in
quarters provided by the employer. The total interest paid in 2007/08
amounts to $80,000.
Decision
It is considered reasonable in the circumstances to allow a deduction
of $80,000 ---- section 26E(2)(a)(i)(B).
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| Scenario
5: |
Dwelling owned by joint tenants
---- mortgage loan executed in joint tenants' names - exclusively
used by the joint tenants as residence |
Facts
Mr A and Mr B are joint owners of their dwelling
which was exclusively used as their place of residence throughout
2007/08. The dwelling was acquired 4 years ago with a mortgage loan
borrowed by them jointly from a bank which is repayable by monthly
instalments over a 10-year period. During 2007/08, the total interest
paid amounts to $180,000. Both Mr A and Mr B claim a deduction for
home loan interest in 2007/08.
Decision
The share of interest paid by Mr A and Mr B in 2007/08
is $90,000 each. A deduction limited to $50,000 is allowed to Mr
A and Mr B each, which is the maximum allowable deduction in proportion
to the number of the joint tenants ---- sections 26E(2)(b)(i) and
26E(2)(c)(i).
Facts
Same facts as in Scenario 5 except that Mr
A and Mr B are tenants in common in the proportion of 1/4 and 3/4.
Decision
The share of interest paid by Mr A and Mr B in 2007/08
is $45,000 and $135,000 respectively. A deduction of $25,000 and
$75,000 is allowed to Mr A and Mr B respectively which is the maximum
allowable deduction in proportion to their respective share of ownership
in the dwelling ---- sections 26E(2)(b)(ii) and 26E(2)(c)(ii).
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| Scenario
7: |
Mortgage loan not applied wholly for
acquisition of the dwelling |
Facts
Mr A purchased a dwelling on 1.4.2007 which is exclusively used
as his place of residence. A mortgage loan of $1,000,000 was borrowed
from a bank of which $500,000 was used to pay part of the purchase
price and the remaining $500,000 on-lent to another person. The
loan is repayable by instalments over a 10-year period. The total
interest paid in 2007/08 amounts to $150,000.
Mr A claims a deduction for the interest paid in 2007/08.
Decision
Since only 1/2 of the loan was used to pay for the dwelling, the
amount of the home loan interest deduction for 2007/08
should be limited to 1/2 of $150,000 i.e. $75,000 ---- section 26E(3)(a).
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| Scenario
8: |
Re-mortgage of dwelling - loan applied
wholly for other purposes |
Facts
Mr A wholly owns a dwelling which was exclusively used as his place
of residence throughout 2007/08. The dwelling
was acquired 10 years ago by a mortgage loan which was fully repaid
in 2006/07. On 1.4.2007, Mr A re-mortgaged the dwelling to a bank
to obtain a loan which was applied wholly for investment in securities.
Mr A claims a deduction for the interest paid of $100,000 in 2007/08.
Decision
The loan obtained on 1.4.2007 was not applied for the acquisition
of the existing dwelling. The claim for home loan interest is not
allowable ---- sections 26E(1), 26E(3)(a) and 26E(9) [definitions
of "home loan" and "home loan interest" ].
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| Scenario
9: |
Change of dwelling during the year ----
2 mortgage loans executed |
Facts
During 1.4.2007 to 30.6.2007, Mr A wholly owned a dwelling which
was exclusively used as his place of residence. The dwelling was
acquired by a mortgage loan 3 years ago. The mortgage interest paid
during this 3-month period amounted to $30,000.
On 1.7.2007, Mr A disposed of this dwelling and purchased another
dwelling which is exclusively used as his place of residence. The
acquisition of the second dwelling was financed by a new mortgage
loan. The interest paid on the second home loan from 1.7.2007 to
31.3.2008 amounted to $80,000. Mr A claims the deduction for the
interest paid during the year 2007/08.
Decision
The claim for aggregate of the first home loan interest and the
second home loan interest is allowed but limited to the maximum
deduction of $100,000 - sections 26E(2)(a) and 26E(3)(b).
Facts
Facts same as in Scenario 9 except that Mr
A disposed of the first dwelling on 1.7.2007 and that he purchased
the second dwelling on 1.6.2007 ( instead of 1.7.2007 ). The interest
paid on the second dwelling during 1.6.2007 to 31.3.2008 amounted
to $70,000. He continued to live in the first dwelling until 30.6.2007.
Mr A claims the aggregate interest paid of $100,000.
Decision
The first home loan interest of $30,000 is deductible. As to the
second home loan interest of $70,000, it is considered reasonable
in the circumstances of this case to allow that part of the interest
paid relating to the period from 1.7.2007 to 31.3.2008 only ----
sections 26E(3)(b) and 26E(4)(b).
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| Scenario
11: |
Income from employment exceeds the aggregate
of personal allowances and home loan interest |
Facts
Mr A's income from employment in 2007/08 amounted
to $300,000. He is single. He claims basic allowance of $100,000
and home loan interest deduction of $100,000. What is the net chargeable
income in his case and how would he know the deduction has been
allowed?
| Decision |
| |
$ |
$ |
| Mr A's
income from employment |
|
300,000
|
| Less
: Home loan interest deduction |
100,000 |
|
| Personal
allowance |
100,000 |
(200,000) |
| |
_______ |
_______
|
| Mr A's
net chargeable income |
|
100,000
|
|
|
=======
|
A notice of salaries tax assessment will be issued
to Mr A showing his net chargeable income and the home loan interest
deduction allowed for the year in question. Mr A will also be notified
by the Commissioner of his deduction status ---- sections 12B(1)(a)
and 26E(5)(a).
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| Scenario
12: |
Income from employment less than the
aggregate of personal allowances and home loan interest
|
Facts
Same facts as in Scenario 11 except that Mr
A's income from employment in 2007/08
amounted to $150,000 only. What is his net chargeable income and
how would he know the deduction has been allowed?
|
|
|
| Decision |
| |
$ |
$ |
| Mr A's income
from employment |
|
150,000 |
| Less : Home loan
interest deduction |
100,000 |
|
| Personal allowance |
100,000 |
(200,000) |
| |
_______ |
_______ |
| Mr A's net chargeable
income |
|
0 |
|
|
=======
|
The deduction is deemed to have been allowed to
Mr A. The 'unallowed' portion of home loan interest will not be carried
forward to future years of assessment. Mr A will be notified by the
Commissioner concerning the granting of home loan interest deduction
in arriving at his net chargeable income (albeit exempt from tax)
and his deduction status. ---- sections 12B(1)(a) and 26E(5)(a).
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| Scenario
13: |
Taxpayer is single and his income from
employment is less than personal allowances |
Facts
Same facts as in Scenario 11
except that Mr A's income from employment in 2007/08 amounted to
$98,000 only. What is the tax treatment in relation to home loan
interest deduction?
Decision
As Mr A's income is below his personal allowance, he is exempt from
tax even without taking into account the deduction of home loan
interest. In the circumstances, Mr A will not be treated as having
been allowed the home loan interest deduction for the year in question
---- section 26E(5)(a).
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| Scenario
14: |
Property owned jointly by husband and
wife and each of them has employment income exceeding their
respective personal allowances and home loan interest paid
|
Facts
In 2007/08, Mr and Mrs A received income from employment of $300,000
and $200,000 respectively. Each of them claims basic allowance of
$100,000 and a deduction for home loan interest paid of $80,000
(total home loan interest paid $160,000) in respect of a dwelling
jointly owned by them. What is the tax treatment for the couple
in relation to home loan interest deduction?
Decision
Both Mr A's and Mrs A's income exceeds the aggregate of his/her
own personal allowance and home loan interest paid. In the circumstances,
deduction of home loan interest will be allowed both to Mr and Mrs
A under separate taxation and their net chargeable income will be
arrived at as follows:
| |
|
Mr.
A |
Mrs. A |
| |
$ |
$ |
$
|
|
| Income
from employment |
|
300,000
|
200,000
|
| Less
: Home loan interest deduction |
50,000* |
|
|
| Personal
allowance |
100,000
|
(150,000) |
(150,000) |
| |
________ |
_______ |
_______ |
| Net
chargeable income |
|
150,000
|
50,000
|
| |
|
======= |
======= |
*Deduction restricted to half share of the maximum
of $100,000
A deduction of $50,000 is allowed to Mr A and Mrs A respectively which
is the maximum amount allowable in proportion to the number of joint
tenants. They are regarded as having each been allowed the deduction
for a year of assessment and will be notified of their respective
deduction status ---- sections 26E(2)(b)(i) and 26E(2)(c)(i).
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| Scenario
15: |
Income from employment less
than the total of home loan interest and personal allowances
---- home loan interest transferable to taxable spouse through
election of joint assessment |
Facts
In 2007/08, Mr A and Mrs A received income from employment of $500,000
and $120,000 respectively. They filed tax returns to the Inland
Revenue Department separately. Mr A claims basic allowance of $100,000
only while Mrs A claims both basic allowance of $100,000 and a deduction
for home loan interest of $70,000 in respect of a dwelling owned
solely by her. What is the tax treatment for the couple in relation
to home loan interest deduction?
Decision
Mrs A's income is less than the aggregate of her personal allowance
and home loan interest deduction. In the circumstances, Mr and Mrs
A should elect joint assessment under s.10(2) of the Inland Revenue
Ordinance to enable the transfer of the unabsorbed allowances and/or
deduction of Mrs A to Mr A. A notice of assessment will be issued
to Mr A showing the aggregated net chargeable income of Mr and Mrs
A arrived at as follows:
| |
$ |
$ |
| Income
of Mr A |
|
500,000
|
| Income
of Mrs A |
|
120,000
|
| |
|
________ |
| Aggregated
assessable income |
|
620,000
|
| Less
: Home loan interest deduction |
70,000 |
|
| Married
person's allowance |
200,000 |
(270,000) |
|
________ |
________ |
| Aggregated
net chargeable income |
|
350,000
|
|
|
======= |
Mrs A will be deemed to have been allowed the home
loan interest deduction and she will be notified of her deduction
status ---- sections 10(2)(a), 12B(2)(a), 26E(2)(a)(i) and 26E(5)(b).
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| Scenario
16: |
Home loan interest to be
deducted from a single person's total income under personal
assessment |
Facts
During 2007/08, Mr A carried on a business. His assessable profits
were $300,000. He elects personal assessment under s.41 of the Inland
Revenue Ordinance. Moreover, he wholly owns his dwelling which is
exclusively used as his place of residence. He claims a deduction
for mortgage interest paid on the dwelling totalling $180,000. What
would be the tax treatment for the home loan interest deduction
under personal assessment?
Decision
| Under personal
assessment : |
|
|
| |
$ |
$ |
| Mr A's
income from business |
|
300,000
|
| Less
: Home loan interest deduction |
100,000* |
|
| Personal
allowance |
100,000
|
(200,000) |
| |
_______ |
_______
|
| Mr A's
net chargeable income |
|
100,000
|
|
|
======= |
*Deduction restricted to the maximum of $100,000
In the circumstances, Mr A is deemed to have been allowed a deduction
for home loan interest for 2007/08 ---- sections 26E(2)(a)(ii), 26E(5)(c),
42(2)(a) and 43(1).
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| Scenario
17: |
Home loan interest to be
deducted from a married person's total income under personal
assessment |
Facts
During 2007/08, Mr A carried on a business and his assessable profits
were $300,000. He is married and Mrs A received rental income from
a let property of which the net assessable value was $50,000. She
wholly owns a dwelling which is used exclusively as their place
of residence. In 2007/08, she paid mortgage interest of $90,000
for acquisition of the dwelling. Mr and Mrs A elect personal assessment
under s.41 of the Inland Revenue Ordinance. What would be the tax
treatment for the home loan interest deduction under personal assessment?
Decision
Under personal assessment:
| |
$ |
$ |
| Total
income of Mr A |
|
300,000
|
| Total
income of Mrs A |
50,000 |
|
| Less
: Home loan interest deduction |
90,000 |
(40,000) |
|
_______ |
_______ |
| Joint
total income of Mr and Mrs A |
|
260,000
|
| Less
: Married person's allowance |
|
(200,000) |
|
|
________ |
| Mr and
Mrs A's net chargeable income |
|
60,000
|
|
|
======= |
Tax chargeable is apportioned between Mr and Mrs A in the proportion
of:
Mr A : Tax chargeable x 100%
Mrs A : Tax chargeable x 0%
Mrs A's home loan interest can only be deducted
by electing personal assessment. She is deemed to be the person
to have been allowed the home loan interest and she will be notified
by the Commissioner accordingly ---- sections 26E(5)(c), 42(2)(a),
42A(1)(b) and 43(1)(b) and (2B).
| Scenario
18: |
Taxpayer signed a Provisional Sales &
Purchase Agreement with the developer to acquire a property for dwelling.
The developer granted him / her a mortgage loan and remained as the
registered owner of the property before the loan was fully repaid
|
Facts
I have signed a Provisional Sales & Purchase Agreement with the
developer to acquire a property for my own dwelling. The developer
granted me mortgage loan. Before the full repayment of the mortgage
loan, the developer remained as the registered owner of the property.
Can I claim for home loan interest deduction of the interest paid
on the mortgage loan?
Decision
According to Inland Revenue Ordinance, the person claiming for home
loan interest deduction must be the registered owner of the dwelling.
Thus, you are not qualified for the deduction.
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