Offsetting mortgage amount on own home into rental home

[Sifu]

Hi Guys

I've read on numerous articles/website that suggests the best way to get the most of your negative geared rental property is put all your mortgage borrowing on your rental instead of your own home to maximize the amount you can claim back on the bank interest.

Ie if your own home is 1 mil and 500k is mortgage and the rental is 1 mil and also 500k mortgage; then its best to take the 500k mortgage and put it on the rental so that you owe nothing on your house and 1 mil on the rental.

My question is how do you go about doing this? I dont think its as simple as going to the bank and telling them to take X amount on this property and put it on that property is it?

Can someone please suggest the right method of doing this?

Thanks

[Don't believe the Hype]

Have you spoken to your accountant? You'll get lots of opinions here but tax avoidance is illegal so I would prefer to get expert advice and stay out of jail.

[brokerman]

Have you spoken to your accountant? You'll get lots of opinions here but tax avoidance is illegal so I would prefer to get expert advice and stay out of jail.

100% this!

[Keithw]

As stated above, skilled accounting advice is required as it can be complex.
Hopefully an experienced accountant will chime in and correct any misconceptions I outline below.

As with most things, it is going it depend on your circumstances.
I am no accountant and I completely understand your desire to know the mechanism, as I also wanted to understand how it works, so here’s my personal understanding of some of the different situations:

Firstly, what is the current ownership structure ?:
Personally owned house & personally owned rental.
Personally owned house & company owned rental (LTC or normal co).
Trust owned house or rental.
Cross collateralised security or separated securities.
Trader or non trader.

From a tax deductability point of view, it does not matter what security was used (house or rental), it is about what the funds were used for.
Loans on your house were used to buy a property for your personal living, so loan & interest are generally NOT deductable.
Loans used to purchase a rental, or to continue the income production from it, are currently also NOT generally deductable themselves as they are capital costs (unless you are trading, ie are part of the trading capital gain calc) BUT their interest costs are.

If capital gains tax on property investments (as opposed to the already present CGT for property trading)is implemented, the deductability of capital costs may change.

So in most cases you cannot simply “Transfer” a loan from your personal house to the rental in order that the interest becomes deductable (effectively tax evasion).

Getting the banks to change what property is used as security has not changed what the loan was used for (private or rental use).

So restructuring is required in order that a loan that was used for private purposes may be paid off by a new loan that has been raised for rental purposes.

If the rental is in a company name and the company owes you for money you have put in previously, ie your current account, then it is “just” a matter of the company raising a loan and repaying some / all of your current account. The amount you can “transfer” by this mechanism will be limited to the amount that the company owes you.
The company raising the loan may or may not have enough security in the rental property to cover the total loan(s), so the personal house may still be part of the security, but the loan(s) are now to the company, not to you personally, and are for the purpose of generating an income via the rental, so their interest becomes deductable.
The total of the loans have not changed, ie the amount needed to buy the property was originally made up of money you had put into the company (ie your personal loan to the company) plus the rental loan, and with the restructure, your personal loan is being repaid.

However if you increased the loans to greater than your current account balance, then there is the question of where the extra is going and what it is being used for.
If the extra is being used by the company to increase the property condition in order to increase the rent then its interest is likely deductable, but if it is paid to you then the use if private & therefore not deductable.


If the rental is in your personal name then you have to overcome the issue of what the loans were used for.
Changing the security hasn’t changed the purpose.
Raising a new loan has to be for the purposes of continuing the rental generation if its interest is to be deductable, and it is unlikely that you can justify 500k on repairs / maintenance/ renovation, so it generally requires the rental to be “sold” into a new entity such as a company or trust.
Again, your personal property may also be part of the bank security, but the loans are to the new entity (company or trust), not to you personally.

Since the purpose of the company / trust is to create income from the rental, its interest is generally deductable.
(If the purpose of the company / trust is also to trade property, then the loan itself is also deductable as an input cost for the purposes of capital gains calcs. )
Your original personal loan is paid of from the proceeds of “sale”.
The sale must be at a commercially reasonable value, it cant be over or undervalued in order to gain some tax advantage for either side.


From a negative gearing perspective, “selling” to a trust prevents the transfer of losses to the private person, so in the past an LAQC / LTC was the obvious new entity, as they allowed the transfer of losses through to the shareholders.
However with proposed ring fencing of losses, that will effectively remove the whole purpose of LTC’s, and hence they will become “normal” companies, where losses are held until the company makes a profit to offset the losses.
This will need to be considered if setting up a new entity to “transfer” loans on negatively geared property.


The whole “transfer” of loans has to be done exactly right or you open yourself up to all sorts of fishhooks, including being caught by the Bright Line test, Tax evasion (ie changing structures purely for the purposes of reducing tax, as opposed to changing in order to repay shareholders or for other sound commercial reasons), inability to negatively gear etc.

Hope this gives you an idea of what is involved with some of the processes.

Again, as stated above, Experienced Accountants need to be involved in the process to do it right.

[cesami20]

Here is a good article.

https://www.cswaikato.co.nz/index.php/latest-news-accounting-hamilton/accountants-hamilton-auckland/183

[Rosco]

Hi Sifu,

It depends a lot on the situation and the reason for doing it. There are two common ways

1) Repaying shareholder current account - This way is quite simple but still needs to be done correctly. If the company with the rentals owes the shareholders a lot, normally in the form of a shareholders current account, then can look at the company borrowing to repay the shareholders

2) Restructure - the article in the post above is a great example of how this can work.

Best to get a property accountant to review your overall structure and recommend on the best way forward.

Ross

[Bluecoat]

Hi Sifu,

It depends a lot on the situation and the reason for doing it. There are two common ways

1) Repaying shareholder current account - This way is quite simple but still needs to be done correctly. If the company with the rentals owes the shareholders a lot, normally in the form of a shareholders current account, then can look at the company borrowing to repay the shareholders

2) Restructure - the article in the post above is a great example of how this can work.

Best to get a property accountant to review your overall structure and recommend on the best way forward.

Ross

Ross, lets say you did all that and now you have a $1M against the rental portfolio. When the ring fencing comes in , that loss will be locked in against future profit. So its not tax deductible against salary anymore when legislation
goes through.

[Rosco]

Ross, lets say you did all that and now you have a $1M against the rental portfolio. When the ring fencing comes in , that loss will be locked in against future profit. So its not tax deductible against salary anymore when legislation
goes through.

Hi Bluecoat,

It depends on the situation.

- Some will be positive, and be paying tax so ring fencing will make no difference
- Some would have been positive before the 1) or 2) and moved to negative after - But would still be saving tax, plus having a loss to use later
- Some will be a loss. But long term will have a plan to use the losses
- Some will be traders and under draft rules can still offset against trading income

With all of these still need to look at the benefit vs the cost. There is no one easy answer!

Ross