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  • Tax Deductible Mortgages....

    Hi all

    I've got a couple of questions about tax and mortgages that someone might be able to answer...

    1. If we work from home and our business pays a lease to our trust for the use of the property, is the interest on the mortgage tax deductible? (because the property is being used to derive an income)

    2. Most of the books I've read indicate that you should borrow up to the max possible against your rental properties (which are tax deductible) and use any balance to pay off your home loan mortgage (which is not tax deductible). Is the balance $ you borrow against the rentals still tax deductible if you use it to pay down your home loan?

    3. And one for the number crunchers out there... is it better to be paying 9.6% interest that IS tax deductible, or 6.5% that is NOT tax deductible?

    Thanks anyone!

    Regan

  • #2
    1. Yes but only for the portion of the property which is being used for business. So if your hjome office is for example 10m2 out of 100m2 you could claim up to 10% of mortgage interest costs, plus 10% of rates, insurance etc.

    2. NO, the interest is only deductible if the loan is used to generate income for your business.

    3. Yes if you are in the top 39% tax bracket, otherwise no.
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    • #3
      Hi,

      Here's a reason to get proper advice:

      1. No, because the property is owned by the Trust, not the business. If you are genuinely paying a 'rent' to the trust, the rent would be deductible in the business, but taxable in the trust.

      2. Yes, so long as it can be shown that the payment from the business is a repayment of shareholder capital.

      3. I'll go with Rolf here, so long as the shareholding of the business is 100% in the name(s) of 39% tax payers.

      Now, for questions 1 & 2, both mine and Rolf's answers MAY be correct, but it depends on EXACTLY how you are structured, and then documentation is important.

      Now, I'm not an accountant, and I don't think Rolf is, and no amount of lay-persons opinions are worth anything in the face of an IRD audit and 150% penalties!

      cube
      DFTBA

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      • #4
        I wouldn't be confident that all general accountants would know either!!!! Perhaps one that specialises in property or a tax expert??

        John

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        • #5
          Cube's view about getting some 'proper' advice is pertinent,
          as is JohnL's view about which accountant.

          Looking at the opposites in the suggestions to your
          question 1, I hope Cube doesn't mind me adding something
          to his comment about Trusts and tax, which may show
          just how valid the overall suggestion for professional advice
          really is.

          Originally posted by Rolf
          1. Yes but only for the portion of the property which is being used for business. So if your home office is for example 10m2 out of 100m2 you could claim up to 10% of mortgage interest costs, plus 10% of rates, insurance etc.
          Originally posted by cube
          1. No, because the property is owned by the Trust, not the business. If you are genuinely paying a 'rent' to the trust, the rent would be deductible in the business, but taxable in the trust.
          Firstly
          Trustee incomes is (still, I think) lower than the top
          personal income tax rate.

          Secondly
          Tax on Trust income presumes that the Trust is retaining
          the income. If the Trust makes a surplus/profit, it can
          distribute that to the beneficiaries so that income tax
          will be at the rate of the beneficiary. Which rate may be
          less than trustee income and the business income.

          So, not only is their 'structure' to consider, there's other
          things like differing income levels in each financial year.

          One 'trick' that may help, is that if both the business and
          the Trust are GST assessable, then monthly returns for
          the business and 6-monthly for the Trust does have
          some interest-income appeal.

          But that doesn't work if they are 'grouped,' for GST purposes.

          And so the ball of twine ravels . . .
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          • #6
            Originally posted by regan View Post
            1. If we work from home and our business pays a lease to our trust for the use of the property, is the interest on the mortgage tax deductible? (because the property is being used to derive an income)
            Originally posted by Rolf View Post
            1. Yes but only for the portion of the property which is being used for business. So if your home office is for example 10m2 out of 100m2 you could claim up to 10% of mortgage interest costs, plus 10% of rates, insurance etc.
            Originally posted by cube View Post
            1. No, because the property is owned by the Trust, not the business. If you are genuinely paying a 'rent' to the trust, the rent would be deductible in the business, but taxable in the trust.
            Yes I agree that you should certainly get professional advice because the definite answer will depend on your particular circumstances.

            What I meant with my reply to question 1 was that if you decide to claim something on your personal home, you can only claim in relation to the area of your home which is used for business purposes, so not the whole mortgage interest is claimable. But you might also be able to claim other costs as well, such as a portion of council rates etc.
            I should have made it more clear that I was answering what COULD be claimed in general, rather than IF you should/can actually claim anything in your situation.

            As others have pointed out, your circumstances will determine exactly what is best to do, and you should seek professional advice in this matter.
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