Renting out your own home.. can one claim interest off mortgage as expense?

[lukasr]

Hi All

I am wondering about whether one can claim interest on a mortgage on a house (in owners name) where the owner moved out and rented out the house to tenants (no other paperwork was carried out).

I have stumbled across Mary Holm's article in the NZ Herald (Mary Holm: Traps in renting out your house) in which she says the following about renting out your own home:

First, you'll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.
And you won't be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.

but I also came across one by Diana Clement (Diana Clement: The advantages and pitfalls of renting) which says that if the owners simply rent out their property...(without transferring to LAQC etc)

...they can only offset the interest from the existing mortgage against their taxes, and not any subsequent top-up.
"The [Inland Revenue Department] only allows you to deduct the amount that was actually borrowed to fund the property when you purchased it."

which implies that one CAN claim the interest off the mortgage (although it may be on the outstanding balance only).

These two comments seem to contradict each other - or am I missing something?

[spaceman]

Slightly longer version.

The test for deductibility is, is the exspense incurred, while deriving taxable income.

The rental income is taxable, the expense of the mortgage is incurred while deriving that taxable income, therefore the mortgage expenses are deductible.

*sits back and waits for xris*

Cheers
Spaceman

[drelly]

Mary is wrong.

[lukasr]

Mary is wrong

That's what I thought - I've been following her column on and off for a while now and noticed that she's very biased towards shares as opposed to property investment and her property investment advice is sometimes off.

[SuperDad]

My understanding is the same as spaceman's.

[CJ]

Originally Posted by drelly

Mary is wrong.

Taking tax advise from journalists is wrong.

Taking tax advise from anon people on forums, ....

Note: agree with Spaceman.

[Wayne]

If I remember the full article it implied that the IRD would take the view that it was the original purpose of the loan that counted. Knowing the IRD this could well be true! If the took this view they may well be wrong but you would have to prove that (remember with the IRD you are guilty till proven innocent).

You could apply for a binding ruling from the IRD if you were in that situation.

[flyernzl]

I did exactly that - 16 years ago. Lived in the house for five years, and then have rented it out ever since. Since renting, I have claimed the mortgage interest as a deduction and (crosses fingers) never had it queried.

The 'original purpose' theory would have strange implications. If you bought a place as an IP and claimed the interest deduction as a legitimate expense, then some years moved in yourself, would you still be able to claim tax-deductible interest? I think not.

Even the IRD has to be consistent. You cannot claim your lotto ticket as a tax deduction even though your intention is to win. Therefore if you do win the prize is not taxable.

[CJ]

Originally Posted by Wayne

If I remember the full article it implied that the IRD would take the view that it was the original purpose of the loan that counted. .

Agree but the purpose of the loan was to buy a house. The house now derives income so the loan would be deductible. If you had topped up the loan to buy a boat, then you start running into issues.

Originally Posted by Wayne

You could apply for a binding ruling from the IRD if you were in that situation.

Do you know how much a binding ruling would cost!

[JohnL]

Thats strange because it was in Mary's column that I read that the interest would be tax deductable (sourced from the IRD). This was years ago now but I remember it as the normal opinion floating around then was that it wouldn't be.

John