Mortgage on own house or rental

[Oopsiedaisies]

A friend is deciding to use their newly acquired inheritance to pay off their mortgage on their family home and be freehold and get a loan for a rental they are yet to purchase.........OR............keep the mortgage on the family home and buy a rental mortgage free. I am no tax expert and guessing that there is advantage to having a rental with a mortgage? What is your advice? They will be using an accountant but yet to find one. This is in Tauranga.

[artemis]

Friend needs to think like a business. A rental can offset expenses, including mortgage interest, against income (rent).

However, IMO not a good time to buy one's first rental as some complex changes are happening. Not a time to rush in without very very sound advice.

This government is increasing compliance /costs on several fronts.

New minimum standards coming via the Healthy Homes Guarantee Act, only for rentals though.

Revision of the Residential Tenancies Act which will include increased tenant rights (as announced).

Ring-fencing rental losses would be a biggie for a new purchase with high interest payments. This is coming next year, details to be announced.

And capital gains tax probably if the current government is back in 2020.

[ScottSI]

Pay off their own mortgage as interest is not tax deductible and then buy a rental if they wish.

Get them to go see a property specialist accountant - Ross on here is in Hamilton

[Nick G]

Own home and then borrow against that to buy a rental.

Debt on own home = for every $1 in interest you earn $1.30, pay tax and pay the interest.
Dept on a rental = for every $1 you pay, you get $0.30 back.

It is nearly 2x as expensive to pay interest on your own home.

Get a property accountant to set you up right for taxes as Scott said.

[Rosco]

As above, obvious and straight forward answer. Use cash to pay off personal house mortgage.

Then borrow to buy a rental property. Then the interest will be deductible reducing the tax they will pay.

I would also think about keeping the rental completely seperate from personal house. So for example use LTC to buy rental with 65% loan from say ANZ. Then use ASB for example, to borrow the 35% under the LTC name, but secured over the personal home. As the loan is used to buy the rental, the interest is still deductible.

Ross

[Anthonyacat]

The obvious answer from a tax perspective has already been given. Just going to raise the potential hitch if they don't have good income for servicability, they might not get the loan for the rental. Likely not the situation here, but raising just in case.

[GLin]

What Ross said above.

[murraythompson]

Yip - good replies on this thread.

Pay off your own mortgage first, then use the equity that you have in your family home to borrow against it for the rental property. The key rule is to have the interest included as a deduction in your tax return, you need to look at the purpose of the amount borrowed. Rental Property Purchase - No Problems - for the purpose of earning rental income. Family Home - Private use, so not able to be used.

Murray
Rental Coach
rentalcoach.co.nz

[brokerman]

Agree completely with the above. Minimal debt on the owner occupied and maximum on the rental.