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  • Rebalancing/Reallocating Mortgages

    If you had 4 properties in a rental portfolio with mortgages against each of them, is it possible to reallocate the mortgages between the properties (ie so one had a larger mortgage and another a smaller)? I'm assuming the bank is OK to do it provided there is equity etc, but what is the IRD view?

  • #2
    If they're all with the same bank, chances are they're all cross collateralised anyway. That meaning, all four loans are secured against all four properties, like a spiderweb.

    From an IRD perspective, debt is tax deductible based on the purpose of its borrowing. If you're borrowing to repay deductible debt, the new debt will be deductible also.
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    • #3
      What's the benefit of juggling the mortgages so? If all four are under one name then isn't the combined income offset the combined expenses/debt (for tax purposes) so does the ratio between them matter? I can see a benefit of loading up three to make one house mortgage free.
      Last edited by Learning; 20-12-2016, 11:41 AM.

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      • #4
        The only benefits would be

        a) to move one to another bank

        or

        b) to turn one into your own home and therefore have no debt against it.

        You could shoot for c) to have one not cross collateralised against the others but banks are not likely to let you do that with existing debt. You would need to do a) in most cases from what I know.
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        • #5
          Hi guys and thank you for your responses, clearly I didn't provide enough info:


          1. The properties are not cross collateralised. We had enough cash deposit for each.


          2. The benefit of juggling the mortgages: we are considering moving into one of the 4 homes, we would lose $X in deductible mortgage interest each month if we did that as currently structured. However if that home we move into is mortgage free (because we shifted its mortgage to the other 3 homes, and we are able to do so because there is enough equity in the others), then we can still get that $X in deductible mortgage interest each month.


          I was more keen to know if the IRD would have an issue with #2 above really.

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          • #6
            Just because you had enough money for each does not necessarily mean they aren't cross collateralised. All depends on your paperwork - banks will often pull others in.

            Safest and easiest way to do it is probably a restructure. to move the three that are still rentals to a company or trust, possibly with a new bank, at 80% lending. And use that money to pay off the mortgage on property 4.
            AAT Accounting Services - Property Specialist - [email protected]
            Fixed price fees and quick knowledgeable service for property investors & traders!

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            • #7
              Originally posted by Icarus65 View Post
              1. The properties are not cross collateralised. We had enough cash deposit for each.
              You think they aren't but I bet the bank (if they are with one bank) wanted a personal guarantee so they are bundled.


              2. The benefit of juggling the mortgages: we are considering moving into one of the 4 homes, we would lose $X in deductible mortgage interest each month if we did that as currently structured. However if that home we move into is mortgage free (because we shifted its mortgage to the other 3 homes, and we are able to do so because there is enough equity in the others), then we can still get that $X in deductible mortgage interest each month.

              I was more keen to know if the IRD would have an issue with #2 above really.
              Deductibility has more to do with the purpose of the loan rather than what it is secured against.
              I think you need some professional advice here.

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              • #8
                Look in your loan agreements
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                • #9
                  Thanks guys but the loans are 100% not cross collateralised, I specifically went over this with the bank. Mortgage A only has recourse against house A, mortgage B against house B, etc... and me personally of course as settlor (but the homes are in a trust), therefore house B could not be taken if mortgage A is defaulted and house A wasn't enough to satisfy the mortgage A debt.

                  I am mostly concerned with what the IRD would think of this:

                  The benefit of juggling the mortgages: we are considering moving into one of the 4 homes, we would lose $X in deductible mortgage interest each month if we did that as currently structured (all 4 homes are rented out). However if that home we move into is mortgage free (because we shifted its mortgage to the other 3 tenanted homes, and we are able to do so because there is enough equity in the others), then we can still get that $X in deductible mortgage interest each month against the income earned from those 3 properties.

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                  • #10
                    No one can tell me if the IRD would have an issue with transferring mortgages between rented/not rented properties in a portfolio? I am sure the issue must have been discussed before?

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                    • #11
                      It all depends on how the legal ownership is written up and the seperation of profits and expenses. Give the IRD a call and discuss your plans and they can advise you how it should be done.

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                      • #12
                        And the IRD will document what your plans are and compare what you've said with what appears in your tax return when you file it and probably smile.
                        Good luck.

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                        • #13
                          Originally posted by Icarus65 View Post
                          No one can tell me if the IRD would have an issue with transferring mortgages between rented/not rented properties in a portfolio? I am sure the issue must have been discussed before?
                          It's been discussed many time before with the resulting conclusion:
                          "Get professional advice. Get it wrong and you'll pay a lot of tax. Get it right and you'll pay less tax."
                          There are several well known PT contributors who know about this stuff - contact them.

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                          • #14
                            Originally posted by Icarus65 View Post
                            No one can tell me if the IRD would have an issue with transferring mortgages between rented/not rented properties in a portfolio? I am sure the issue must have been discussed before?
                            Hi Icarus65,

                            Every situation is different.

                            You need a commercial reason why you would restructure your affairs. It sounds like you currently have the rentals under a Trust, so you have to be very careful as you already have asset protection.

                            There might be others ways to do this transaction as well, ie rather than moving your rentals out of the Trust.

                            Also watch your costs vs benefits, as your might have depreciation recovery, be caught by 2 year brightline rule, have break fees and you will have legal costs.

                            I would suggest you get expert advice from a Chartered Accountant who specialises in property.

                            Ross
                            Book a free chat here
                            Ross Barnett - Property Accountant

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                            • #15
                              Originally posted by Bob Kane View Post
                              And the IRD will document what your plans are and compare what you've said with what appears in your tax return when you file it and probably smile.
                              Good luck.
                              I've never needed to identify myself when seeking advice.

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