Renting out your own home.. can one claim interest off mortgage as expense?

[lukasr]

Hi All

I am wondering about whether one can claim interest on a mortgage on a house (in owners name) where the owner moved out and rented out the house to tenants (no other paperwork was carried out).

I have stumbled across Mary Holm's article in the NZ Herald (Mary Holm: Traps in renting out your house) in which she says the following about renting out your own home:

First, you'll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.
And you won't be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.

but I also came across one by Diana Clement (Diana Clement: The advantages and pitfalls of renting) which says that if the owners simply rent out their property...(without transferring to LAQC etc)

...they can only offset the interest from the existing mortgage against their taxes, and not any subsequent top-up.
"The [Inland Revenue Department] only allows you to deduct the amount that was actually borrowed to fund the property when you purchased it."

which implies that one CAN claim the interest off the mortgage (although it may be on the outstanding balance only).

These two comments seem to contradict each other - or am I missing something?

[spaceman]

Short answer ....Yes.

Slightly longer version.

The test for deductibility is, is the exspense incurred, while deriving taxable income.

The rental income is taxable, the expense of the mortgage is incurred while deriving that taxable income, therefore the mortgage expenses are deductible.

*sits back and waits for xris*

Cheers
Spaceman

[drelly]

Mary is wrong.

[lukasr]

Mary is wrong

That's what I thought - I've been following her column on and off for a while now and noticed that she's very biased towards shares as opposed to property investment and her property investment advice is sometimes off.

[SuperDad]

My understanding is the same as spaceman's.

[CJ]

Mary is wrong.

Taking tax advise from journalists is wrong.

Taking tax advise from anon people on forums, ....

Note: agree with Spaceman.

[Wayne]

If I remember the full article it implied that the IRD would take the view that it was the original purpose of the loan that counted. Knowing the IRD this could well be true! If the took this view they may well be wrong but you would have to prove that (remember with the IRD you are guilty till proven innocent).

You could apply for a binding ruling from the IRD if you were in that situation.

[flyernzl]

I did exactly that - 16 years ago. Lived in the house for five years, and then have rented it out ever since. Since renting, I have claimed the mortgage interest as a deduction and (crosses fingers) never had it queried.

The 'original purpose' theory would have strange implications. If you bought a place as an IP and claimed the interest deduction as a legitimate expense, then some years moved in yourself, would you still be able to claim tax-deductible interest? I think not.

Even the IRD has to be consistent. You cannot claim your lotto ticket as a tax deduction even though your intention is to win. Therefore if you do win the prize is not taxable.

[CJ]

If I remember the full article it implied that the IRD would take the view that it was the original purpose of the loan that counted. .

Agree but the purpose of the loan was to buy a house. The house now derives income so the loan would be deductible. If you had topped up the loan to buy a boat, then you start running into issues.

You could apply for a binding ruling from the IRD if you were in that situation.

Do you know how much a binding ruling would cost!

[JohnL]

Thats strange because it was in Mary's column that I read that the interest would be tax deductable (sourced from the IRD). This was years ago now but I remember it as the normal opinion floating around then was that it wouldn't be.

John

[Green Fish]

It's a ridiculous situation. We're all citizens of NZ, and we should all, at very least, be entitled to know the laws of the land - the most important of which are the laws that give the government its money, namely, the tax laws. And yet the topic is shrouded in mystery. The actual legislation will blow the memory on most PCs, and even if it doesn't, no-one can possibly follow it.

So the IRD publishes its interpretations of the legislation, many of which are wrong. And then silly female journalists publish their own interpretations of the IRD's interpretations, which are even wronger.

Time for some basic common sense: Of course the interest is deductable (unless you borrow money, using the property as security, to buy that nice new fishing boat.)

[spaceman]

ummmm nothing I think

.......Do you know how much a binding ruling would cost!

There is a thing called a NOPA ...Notice Of Proposed Adjusment IR 770

Basically it means that you can file a tax return .....then file the NOPA ...the IRD then have a time limit in which to reply. If they don't reply in time or don't reply at all you are entitled to act as if your NOPA was accepted by the IRD.

Effectively a binding ruling without costing you anything.

The IRD do have the right to argue, but it must be done inside the time limits (2 months). If the IRD take longer than the two months and end up disagreeing with your NOPA, they aren't able to take any action against you as far as penalties go. You are also entitled to argue your case further and go through a disputes resolution process if they do reject your NOPA.


Cheers
Spaceman

[Green Fish]

Spaceman: Isn't it the IRD that delivers the NOPA to the taxpayer? The taxpayer files the return. The IRD disgrees and then delivers a "Notice Of a Proposed Adjustment" to the taxpayer. And then the taxpayer can take things up with the Taxation Review Authority.

[CJ]

GF - both can file NOPA.

SM - a NOPA is not a binding ruling. The rest of what you say is about right.

[spaceman]

pigs is pigs

GF - both can file NOPA.

SM - a NOPA is not a binding ruling. The rest of what you say is about right.

Effectively it is, if you follow things through to the end .....surely???

Cheers
Spaceman