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  1. #1

    Default Renting out your own home

    Hi all. We would like to rent out our home in NZ whilst we go live in Australia. Would the interest on our mortgage then be tax deductible? I originally thought yes of course but then I read somewhere that it would go on the purpose of the loan, and that if the original purpose of the loan was not for rental property then it wouldn't be allowed. Actually I think I read this on the ATO site, was wondering if same applied in New Zealand? Any thoughts would be appreciated.

  2. #2
    Join Date
    Jan 2004
    Location
    Whangarei
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    5,867

    Default

    If you have a look at this PDF document off the IRD web site: http://www.ird.govt.nz/library/publi...info/ir264.pdf

    You can see on pages 8 and 13 that it does indeed say that interest is not deductible on mortgages raised for the some purpose other than financing a rental property (like your own home)

    However, once you move out of your own home, it becomes a rental property and the purpose of the mortgage is then to finance that investment.

    If you wanted to be really picky, you could form a company, raise a new mortgage for the company to purchase the house, pay off the old personal one and the new one is then clearly deductible.

    Furthermore.... if you lived in your own home and then got in two flatmates, by law, you have to declare the income and therefore the interest on your mortgage is deductible so the fact that it is your own home is not the be all and end all.

    Personally, I think some of these IRD brochures are designed to lead people into not claiming expenses they can by being deliberately vague! By the way, I'm not an accountant and this is my own personal opinion. It is also why you can understand it!

  3. #3

    Default

    Thanks Dave! I agree with you that it should then be classed as a rental and therefore tax deductible. Seems to me that the tax laws have a lot of 'grey area' in them don't they, especially property related laws. A lot comes down to interpretation. Easy to make mistakes with it all. Thanks again for the reply.

  4. #4
    Join Date
    Oct 2004
    Location
    Hamilton
    Posts
    108

    Default

    Good post Dave!

  5. #5
    Join Date
    Jun 2005
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    Auckland
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    3,936

    Default

    Well having been in the same situation. You face two issues which are often confused. Your Australian tax return and New Zealand tax return.


    1.OZ return. you need to declare foreign assets and rents. But these are not tax deductible against any australian income earnt.

    2.NZ return. Your expenses on your NZ rental are deductible against any income derived in NZ. The downside here though is you are working in Oz and may have no NZ income to claim against. However the tax losses can be accumulated year after year untill such time as you move back to NZ to work. Then you will get a big refund in your first year back.

    the rules are one sided tho. From what I gather if I had a investment property in Oz and lived in NZ it would be treated the same as having one in NZ.


    Ok I have been back in NZ a couple of years so you will need to verify alot of this for peace of mind.

  6. #6

    Default

    Hi Whitt

    Sorry for not replying sooner but yes I can confirm you are right on all these points. Yes it is one sided I agree, the Australians want to know what your rents are etc on your NZ property but don't want to allow any expenses! And not only that, if you live in NZ but have an Australian investment property and depending on where you got your loan from to purchase that Australian property, you will be up for Non Residents Withholding Tax, which means whatever interest you paid to say your Australian bank, the IRD wants you to pay them (the IRD) a further 10% of that interest! Unless you register for AIL then it's only 2%. So in my view the ATO & the IRD are as bad as each other. Thanks for the post Whitt.

  7. #7
    Join Date
    Dec 2006
    Location
    Wellington, NZ/Rotterdam, NL
    Posts
    2

    Default using property one as security for property two

    Quote Originally Posted by drelly View Post
    If you have a look at this PDF document off the IRD web site: http://www.ird.govt.nz/library/publi...info/ir264.pdf

    You can see on pages 8 and 13 that it does indeed say that interest is not deductible on mortgages raised for the some purpose other than financing a rental property (like your own home)

    However, once you move out of your own home, it becomes a rental property and the purpose of the mortgage is then to finance that investment.

    If you wanted to be really picky, you could form a company, raise a new mortgage for the company to purchase the house, pay off the old personal one and the new one is then clearly deductible.

    Furthermore.... if you lived in your own home and then got in two flatmates, by law, you have to declare the income and therefore the interest on your mortgage is deductible so the fact that it is your own home is not the be all and end all.

    Personally, I think some of these IRD brochures are designed to lead people into not claiming expenses they can by being deliberately vague! By the way, I'm not an accountant and this is my own personal opinion. It is also why you can understand it!
    ***^
    I have a similar situation to the original post. I have a grey area relating to a mortgage for a rental and holiday home (outgoings and improvements) expenses.

    We live in the netherlands as expats (2.5 years now). We have 2 properties; one of which is tenanted (property1), the other a holiday home we keep empty for our annual holidays (property2), both in NZ. I am a bit confused about our tax/income situation/expenditure/bank account situation with the two properties.
    Property1 is the rental property with mortgage and property2 is our holiday home, freehold from equity taken from property1. Our expat financial situation is a little complicated.

    Am I right in my interpretation that you are :
    1. Able to transfer the family home to a rental property and can claim expenses and interest incurred.
    2. You are able to purchase a private dwelling using security of a rental property.
    3. That only the original portion of interest deductible, not the new increased figure? If the latter is so, how on earth do we calculate this retrospectively?
    4. Should we have a separate account for the other house and other expenses?

    As with other 'posters', IRd info is very light on specifics and free and impartial advice for small, private property investors is almost non-existent. any clarification gratefully received.

  8. #8
    Join Date
    Nov 2005
    Posts
    3,286

    Default

    Hello wellygirl,

    I am a little confused with some of your comments but here is a stab at a reply. Others may disagree or course.

    1. Able to transfer the family home to a rental property and can claim expenses and interest incurred.
    You can use the family home as a rental at any time. I believe you can claim usual expenses as tax deductions from the moment you start doing this rates/r&m/rates etc – but you cannot claim the interest on the loan used to buy that home – never. (heck the current thread on this subject for differing opinions).

    • You are able to purchase a private dwelling using security of a rental property.

    Yes, absolutely. The security used to secure a loan is of no consequence and does not relate to the point I made above in your question one.

    3. That only the original portion of interest deductible, not the new increased figure? If the latter is so, how on earth do we calculate this retrospectively?

    Sorry, I don’t understand this question. Could you reword it?

    4. Should we have a separate account for the other house and other expenses?

    There is no law to that effect. You just need to keep records clear enough to show what is happening with the money. However, I believe it is always a good idea, especially with even mildly complicated set-ups, to keep separate accounts for separate money – family home money in one acct, rentals in another, expenses in another and so on. It clarifies matters in your mind if nothing else, and will make your accountants job a lot easier.

    xris

  9. #9
    Join Date
    Dec 2006
    Location
    Wellington, NZ/Rotterdam, NL
    Posts
    2

    Default claiming interest and expenses etc

    Thanks for the response.
    ITo clarify point 3: I thought that we would be able to claim the interest portion of the loan on the property at the point it became a rental and forwards. Other usual expense deductions would be rates, insurance, depreciation on furnishings/whiteware, maintenance?

    My confusion was in relation to buying our second property and the way we paid it off and claiming interest as an expense. We used the equity in the rental house to freehold the second one, thereby increasing the mortgage, easier for us to manage from over here. We have been claiming the interest on the loan but I read recently that although we were able to purchase a private property using the first as security, we could not claim the additional interest the new increased loan incurred. Is that clearer?


 

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