Owner occupied house turning into a rental property - tax benefits

[Mantaray]

Hi everyone,

I was hoping some seasoned investors could help me with understanding the process of turning the house we currently own and have rennovated into a rental.

Here's how I think it works from research, but need clarification;

- We have the mortgage currently, obviously as owner occupied.
- We need to effectively break the mortgage and pass it into a look-through company we set up as a mortgage with intention for rental purposes so there is a clear cut line that it is in fact a rental property so we can reap the tax benefits.

The next place we are buying, we will offset the mortgages so this property (soon to be the rental), shows a loss.

Am I heading in the right direction with this or not?

I look forward to the input of everyone, thanks.

[artemis]

Have a read of IR264 from IRD. It covers the situation where a place is only rented for part of the year, and gives an example of owner occupied becoming a rental.

You may want a LTC for other reasons but for tax you need to be able to show it is available to rent and tenancy agreement.

[Rosco]

Hi Mantaray,

How good is your current property as a rental?

What is the gross yield?

What is the cashflow with a 100% mortgage at say 4.6%, and all costs such as repairs, travel, property manager and other obvious ones?

What happens if interest rates go up to say 6.6%? Do you have the cashflow to survive, and how does the investment look then?

Other property things like, level of tenant hassle, long term maintenance, level of gardens, high value items that could be wrecked, long term location.

Overall, I suppose the question is, "if you were buying a rental property and looking at it solely from a rental perspective, would you buy your existing house as a rental?"


With your proposed restructure, you need to make sure you do this right, so I would suggest getting expert advice. An LTC is an option, but it does depend on your circumstances. Going through your cashflow, how it all works, tax tips and structure with a chartered accountant who specialises in property will help you understand the true cost/benefit and give you a better overall understanding. Plus help with mortgage strategies and reducing your tax! We do an initial, full advice meeting for 1 hour, at a discounted rate of $245 incl GST, so I think it is well worth spending a little bit to get it right. Otherwise I would only suggest GRA as there are lots who just don't understand property and structures.

Good luck

Ross

[Mantaray]

Thanks a lot for the replies.

Rosco, I think you're dead right with really needing to see a property specific accountant. I'm in Chch, so I imagine your services (which sound ideal for what we need) are not based here.
We brought the property a few months back to be a rental. We purchased the property below market value, and have renovated the entire thing, leaving us with a revalued property with equity created for a tidy deposit to do the same again. We have worked out the the yeild and servicing etc and we are in a comfortable position. It's just technically moving forward.

Really appreciate the input, its given me more options to explore.

[Rosco]

There is skype, emails etc

Also watch new brightline test if purchased after 1/10/15!

And have to consider tax avoidance. Why didn't you buy property straight under LTC to start with? Based on this argument you might find it harder to restructure and will need to be careful on this!

Ross

[Anthonyacat]

As Rosco has said, these days you don't need to be physically nearby your accountant. I'm personally based in London for the time being, but only of my clients does; the rest are in New Zealand and don't mind the distance at all.

Very important to consider the brightline (new 2-year test) if you're looking to sell the property to an LTC. Don't want any gains to be taxable!

[Mantaray]

That's a good point. I may well contact Ross in the near future.

Given this is our main home, selling to a LTC would be an exemption to tax, wouldn't it?