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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 31.3.2019, the total interest paid out of the 12 instalments ( the last one being paid on 5.3.2019 ) amounts to $120,000. He claims the deduction for home loan interest for the year of assessment 2018/19.

Decision
For the year of assessment 2018/19, 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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Scenario 2: Mortgage loan interest paid during construction period

Facts
On 1.9.2017, Mr A purchased from the developer a property which was under construction. On 1.11.2017, 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 1.12.2017 onwards.
The property was ready for occupation on 1.4.2018. 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 2017/18 and $120,000 in 2018/19.

Decision
No deduction can be allowed in 2017/18. Although the property in question is a dwelling, it was not yet used as Mr A's place of residence in 2017/18. On the other hand, the interest limited to $100,000 paid in 2018/19 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 2018/19.

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 2018/19 ), 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).

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Scenario 4: Dwelling sold in the course of the year 

Facts
Same facts as in Scenario 1 except that Mr A disposed of the dwelling in question on 1.10.2018 and thereupon fully repaid the balance of the mortgage loan. He then lives in quarters provided by the employer. The total interest paid in 2018/19 amounts to $60,000.

Decision
It is considered reasonable in the circumstances to allow a deduction of $60,000 ---- 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 2018/19. 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 2018/19, the total interest paid amounts to $180,000. Both Mr A and Mr B claim a deduction for home loan interest in 2018/19.

Decision
The share of interest paid by Mr A and Mr B in 2018/19 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).

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Scenario 6: Dwelling owned by tenants in common 

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 2018/19 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 1.4.2018 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 2018/19 amounts to $150,000. Mr A claims a deduction for the interest paid in 2018/19.

Decision
Since only 1/2 of the loan was used to pay for the dwelling, the amount of the home loan interest deduction for 2018/19 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 2018/19. The dwelling was acquired 10 years ago by a mortgage loan which was fully repaid in 2017/18. On 1.4.2018, 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 2018/19.

Decision
The loan obtained on 1.4.2018 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 1.4.2018 to 30.6.2018, 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 1.7.2018, 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 1.7.2018 to 31.3.2019 amounted to $80,000. Mr A claims the deduction for the interest paid during the year 2018/19.

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).

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Scenario 10: Two loans with overlapping period 

Facts
Facts same as in Scenario 9 except that Mr A disposed of the first dwelling on 1.7.2018 and that he purchased the second dwelling on 1.6.2018 ( instead of 1.7.2018 ). The interest paid on the second dwelling during 1.6.2018 to 31.3.2019 amounted to $70,000. He continued to live in the first dwelling until 30.6.2018. 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 1.7.2018 to 31.3.2019 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 2018/19 amounted to $300,000. He is single. He claims basic allowance of $132,000 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 132,000 (232,000)
  _________ _________
Mr A's net chargeable income     68,000
    =======
 

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 2018/19 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 132,000 (232,000)
  _________ _________
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 remaining years of entitlement for the deduction. ---- 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 2018/19 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 2018/19, Mr and Mrs A received income from employment of $300,000 and $200,000 respectively. Each of them claims basic allowance of $132,000 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 132,000 (182,000) (182,000)
  _________ _________ _________
Net chargeable income   118,000  18,000
    ======= =======

*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 2018/19, Mr A and Mrs A received income from employment of $500,000 and $150,000 respectively. They filed tax returns to the Inland Revenue Department separately. Mr A claims basic allowance of $132,000 only while Mrs A claims both basic allowance of $132,000 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   150,000
    _________
Aggregated assessable income   650,000
Less : Home loan interest deduction   70,000  
           Married person's allowance 264,000 (334,000)
  _________ _________
Aggregated net chargeable income   316,000
    =======

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 2018/19, 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 132,000 (232,000)
  _________ _________
Mr A's net chargeable income     68,000
    =======

*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 2018/19 ---- 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 2018/19, Mr A carried on a business and his assessable profits were $350,000. 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 2018/19, she paid mortgage interest of $90,000 for acquisition of the dwelling. Mr and Mrs A elect personal assessment jointly under s.41(1A) 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   350,000
Total income of Mrs A 50,000  
Less : Home loan interest deduction 90,000   (40,000)
  _________ _________
Joint total income of Mr and Mrs A   310,000
Less : Married person's allowance   (264,000)
    _________
Mr and Mrs A's net chargeable income     46,000
    =======


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).

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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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Scenario 19: During the years of assessment from 1998/99 to 2011/12, the taxpayer has claimed deduction of home loan interest for 10 years. How to claim his/her further deduction which effective from 2012/13

Facts
On 1 July 1998, Mr A purchased a flat and immediately occupied it as his place of residence. He has been allowed home loan interest deduction for 8 years of assessment from 1998/99 to 2005/06. On 1 April 2006, he sold the dwelling. On 1 October 2007, he purchased a new flat and has been allowed home loan interest deduction for 2 years of assessment from 2007/08 to 2008/09. During the years of assessment from 1998/99 to 2011/12, Mr A has claimed 10 years of home loan interest deduction. What would be the tax treatment for the home loan interest paid for the year of assessment 2009/10 and subsequent years?

Decision
As Mr A has claimed deduction of home loan interest deduction for 10 years of assessment, he cannot get further deduction of home loan interest for the years of assessment 2009/10 to 2011/12. He can only claim up to a total of 10 additional years of deduction from the year of assessment 2012/13 onwards ---- section 26E(4)(d).

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Scenario 20: Taxpayer had already got 8 years of home loan interest deduction during the years of assessment 1998/99 -2011/12. The number of years that he can claim deduction as from the year of assessment 2012/13

Facts
On 1 June 1999, Mr. A purchased a flat and immediately occupied it as his place of residence. He obtained a 20 years mortgage loan from the bank. He had been allowed home loan interest deduction for 8 years of assessment from 1999/2000 to 2006/07. He did not claim home loan interest deduction from 2007/08 to 2011/12. What would be the tax treatment for the home loan interest paid for the year of assessment 2012/13 and subsequent years?

Decision
As Mr. A has been allowed home loan interest deduction for 8 years during the years of assessment 1998/99 to 2011/12, he can claim up to a total of 12 years of deduction from the year of assessment 2012/13 onwards ---- section 26E(4)(c).