Buying A New Family Home and Rent Out The Old One

[Future]

Hi everyone, I'm new to the rental property. Could you someone please give me some tax advice on the following?

My husband and I have recently bought (settlement date late September) a new family home A worth $1.2m and planning to rent out our current family home B which we purchased in 2011 with current market value cica $800k. We are mortgage free with property B and have used it as equity to fund the purchase of property A, i.e property A bears all the $1.2m bank loan. I understand we would miss out the interest deduction for the future rental property B as it is now mortgage free. But would it be possible to transfer property B to a LTC now and get the tax deduction? Would IRD consider this as tax avoidance?

Any advisory would be much appreciated.

[Rosco]

Hi Future,

You are correct that if you do nothing, rental B will have no mortgage so no interest, so no tax deduction.

If you take out a new loan of say $800k, on rental B, still no tax deduction as the loan is still used to buy Home A.

So yes you would normally look at a restructure to a Trust or LTC, depending on your circumstances. As long as this is done correctly, then interest would become deductible to Trust/ LTC and IRD have stated they do not consider this tax avoidance.

I would suggest getting advice from a chartered accountant who specialises in property. You also need to consider, is Home B a good investment? What is your gross yield and overall cashflow on the property with a $800k mortgage?

Ross

[Future]

Thank you so much Ross and have a great weekend!