To rent or not to rent???

[jane]

I'm very new to investing but my situation is like this...Have just purchased my first investment property which needs about a $40 top up each week. It's in an LAQC.
Our own home is too small for us now (have 4 kids!!). Was wondering whether we should sell our home to the LAQC, turn into a rental which would be cash flow positive by about $40 a week and move into a rental. Can someone who is brainier than me take me through the advantages of doing this from a tax perspective?? How exactly does one see the so called tax deductions? How can I profit from them? Any ideas would clear the mud. Cheers

[spaceman]

No tax advantages

There are no tax advantages to the plan of action you're suggesting.

1. paying of your mortgage is non-deductable debt.
2. paying rent is non-deductable debt.


The supposed advantage of renting is that you live in a place that would cost you more per month to buy then to rent ... ie mortgage payments would be $2,000/month while the market rent is $1,000/month leaving you $1,000 extra month to invest.

Personally I don't think it's a good idea..... but different strokes for different folks.


How about this for a plan.(i'm assuming there is a Mr Jane)

You form Janes property investment co ltd ... with you as sole shareholder and director .... buy a property with lots of nice deductable debt .... rent it at market rates to Mr Jane..... you all move to the new place and rent out your existing family home ...you now own 3 properties and all debt is tax deductable.

Cheers
Spaceman

[Keys]

Personally I don't think it's a good idea..... but different strokes for different folks.

If I was raising kids again and needed to get bigger homes/more space. It's what I would do.

How about this for a plan.(i'm assuming there is a Mr Jane)

You form Janes property investment co ltd ... with you as sole shareholder and director .... buy a property with lots of nice deductable debt .... rent it at market rates to Mr Jane..... you all move to the new place and rent out your existing family home ...you now own 3 properties and all debt is tax deductable

Run this by your accountant. My accountant and lawyer frowned upon it.


Keys

[xris]

How about this for a plan.(i'm assuming there is a Mr Jane)

You form Janes property investment co ltd ... with you as sole shareholder and director .... buy a property with lots of nice deductable debt .... rent it at market rates to Mr Jane..... you all move to the new place and rent out your existing family home ...you now own 3 properties and all debt is tax deductable.

Cheers
Spaceman

Now, let me see, where has this topic come up before?

[xris]

Hello Jane,

For your benefit if this is confusing you...

If you borrow money to buy your own home the interest is not deductible, and if you do claim and are later found out the penalties in every sense are large.

Some people say that you can get around this by being a little creative with your accounting, such as selling the house to an laqc and renting from the laqc, and there are many variations to this.

Others say that this is easier said than done and that by doing the above you are simply playing games with no real business intent other than to avoid paying tax, and the ird will not allow it.

There are very many aspects to this subject and they have all been discussed here many times. If suggest running a search and reading through some of the threads.

xris

[spurner]

I disagree that there is no tax advantage in selling ones own home to an LAQC and subsequently renting another house more suitable for your needs. I think thousands of dollars could be saved.

Currently, the interest, expenses and depreciation on jane's own home is non tax-deductible. If the property were to be sold to an LAQC and rented out then obviously all these costs WOULD be tax deductible. I don't think jane's intention was ever to rent the house to herself, as the house is no longer suitable for her needs.

Without a doubt renting your own home is more financially advantageous in every conceivable situation. (And I'm not talking about buying vs renting. I'm talking about buying and living in x property vs buying and renting x property and renting y property).

My 2c

[JohnL]

Jane

Renting has the advantage of allowing you to live in a house or an area you can't afford at the moment, and/or leaving you more money to invest with. You don't even have to pay for maintenance. So financially you can be better off renting (initially) and putting your money into investment properties.

There are some emotional & stability factors which obviously come into play when making this type of decision.

John

[spaceman]

guilty as charged

Now, let me see, where has this topic come up before?

But at least I'm putting my money where my mouth is.

I'm currently doing almost exactly what I suggest here.

Differences are.
1. Company is formed with 2 shareholders and directors me & FM.
2. I'm living outside NZ
3. House is being rented to Mrs FM at market rates.

Before undertaking this course of action I sought professional advice....I saw an accountant and Mrs FM who works at an accountants office sought advice from them ....the all clear was given.

I'm not suggesting everbody can do exactly what I have done, as my circumstances are unique to me, and I haven't explained them all..... complaining that Spaceman's doing it while getting screwed over by the IRD will probably only get you the reply from the suits of ...Yes but that nice Mr Spaceman is doing it correctly .....nevertheless the general thrust is correct.

If you borrow money to buy your own home the interest is not deductible, and if you do claim and are later found out the penalties in every sense are large.

I agree with Xris here. But ownership is the key. It is possible to borrow money to buy the house you're living in and for the costs to be deductable.

Cheers
Spaceman

PS ....Spurner....You've melted my tiny brain ...I've read and re-read your post and I can't figure out what you're trying to say

[tricky]

PS ....Spurner....You've melted my tiny brain ...I've read and re-read your post and I can't figure out what you're trying to say

Without a doubt renting your own home is more financially advantageous in every conceivable situation. (And I'm not talking about buying vs renting. I'm talking about buying and living in x property vs buying and renting x property and renting y property).

I think I'm following you, spurner, and I'm curious - if people pay me money then I get richer. But if I pay others money (rent) then I get poorer. Can you expand on your comment please?
There's more to this than I've considered before.
I suspect this topic might deserve a whole new thread to itself.

[xris]

Hello spurner,

I too am a little confused and I think the reason is because of the terminology you use.

The good old verbs rent and let have been all muddled up over time, with let falling from grace to be replaced by rent out. Unfortunately that phrasal verb is often reduced to the transitive verb rent, which is exactly the same in appearance as its opposite, rent (tr.) but with the exact opposite meaning, namely that of let.

Could you please clarify your post?

xris

[spurner]

Okay it seems I've not made myself too clear, as xris says I'm sure I'm guilty of mixing a few verbs up which didn't help, anyway here goes:

jane has her existing property which jane resides in (property x). jane also owns a rental property (property y), and jane wants another property better suited to her needs (property z). It seems there are 2 options being considered:

1. jane sells property x to an LAQC which is then let out to another family. jane rents property z from a private landlord. jane keeps property y. This is the best option in my opinion as every cent of mortgage interest, rates, insurance and depreciation are tax deductible. jane gets to keep 2 properties, live in the house she wants, and doesn't have to buy/sell any property (except transfer property x to the LAQC).

2. jane sells property x on the open market, and uses the proceeds to purchase property z and live in it herself. jane keeps property y. This is not such a good option because the mortgage interest, depreciation and expenses from only 1 property(y) is tax deductible, while no deductions are allowed from property z. In addition, it is necessary to sell one property on the open market and buy another property on the open market which will take up considerable time and money. And the end result is jane still owns 2 properties, the same number as in option 1, but with less tax deductions, more expenses and more hassle.

3. There was a 3rd option put forward of selling property x, then buying property z in an LAQC and renting to herself to claim tax deductions. This would solve the tax deductibility loss in option 2 but is seriously frowned upon by the IRD, and not recommended. It also necessitates selling 1 property and buying another.

The only benefit of option 2 over option 1 is that jane gets to own property z rather than rent, which is more beneficial in terms of security. This has to be weighed up against the benefit of additional tax benefits and other savings.

In terms of capital gains there will be no difference, as jane will still own 2 properties and reap the capital appreciation from 2 properties in both the options outlined above.

I hope I haven't lost anyone here again...?

[spurner]

I think I've covered this in my post above, but:

If you pay others money (rent) you may get poorer, but if you pay others money (mortgage+rates+insurance+r&m) then you will be even more poor!

The obvious argument to the above paragraph is that you don't get capital appreciation from a property you rent from a landlord. This is true, but rather than buy a property to live in yourself, you could buy an IP instead, which would provide a better yeild than the type of property you would want as a PPOR. In addition to the better yeild, you are eligible for tax deductions. So the end result is that you WILL get richer by renting rather than owning your own property.

As mentioned before, the financial benefit of renting has to be wighed up against other (non-financial) considerations.

Personally, I bought many IP's while I was still renting, as the money was working harder in an IP than it would my own house, and my portfolio could be grown quicker. Now I own many properties and yet still rent the place where I live. Although this is now due to a lifestyle choice rather than financial considerations.

Hope you're still with me on this one!

I think I'm following you, spurner, and I'm curious - if people pay me money then I get richer. But if I pay others money (rent) then I get poorer. Can you expand on your comment please?
There's more to this than I've considered before.
I suspect this topic might deserve a whole new thread to itself.

[tricky]

Thanks spurner. Very good explanation.

I do recall a suggestion in an investment book which said to join in with a friend and buy a house each. And then rent the houses to each other. All the costs are then deductible for both both of you. It sounds ok tax-wise but I'm no accountant.

[spurner]

Yes I heard/read about that somewhere too and sounds like a pretty creative and legitimate solution.

Although I can think of endless things which could go awry in that scenario, all of which would have a bad outcome.

Thanks spurner. Very good explanation.

I do recall a suggestion in an investment book which said to join in with a friend and buy a house each. And then rent the houses to each other. All the costs are then deductible for both both of you. It sounds ok tax-wise but I'm no accountant.

[spaceman]

thanks spurner...

...though I'm not sure my brain will ever be the same again......I think with my plan jane will actually end up with 3 properties all with deductable debt.

Thanks spurner. Very good explanation.

I do recall a suggestion in an investment book which said to join in with a friend and buy a house each. And then rent the houses to each other. All the costs are then deductible for both both of you. It sounds ok tax-wise but I'm no accountant.

Tricky....I did this (pretty much) 7 years ago ...has gone ok so far.....even simpler would be what I suggested earlier namely... buy a house and rent it to your other half.

Cheers
Spaceman