Renting Out Our Personal Home

[Vision]

We are planning in July to rent out our current home which is in my wife and my joint names and buy on using the 90% equity. I appreciate we will need to have the home market valued and intend to place into a new LTC on renting with our effective interest being a 50/50 share split. Our intention was to fund it with 100% borrowings to maximize interest tax deductions, our economic exposure would be 100% to the bank. I have been informed there are changes from April 1 with the new LTC rules that you cannot offset total borrowings, only the current mortgage debt as the entity change is not at arms length?
Obviously we wish to maximize the tax deductions, if the above is correct are we then better to look at a trust even thought the tax credits will be locked in for many a year although it will offer asset protection benefits. Thanks for your advice.

[Keys]

You live in property "A" and intend to rent it out?

You intend to purchase property "B" and fully finance it?

You intend to live in property "B"?

None of the interest payable on property "B" is tax deductible unless you sell property "A" to something.

Consult an accountant.

[Keithw]

Its like keys says
Tax deductability comes from the purpose of the borrowings.
You are about to borrow to purchase your private residence, that is not deductable.
You need to go through a process of selling the rental to another entity (LTC or trust)& borrowing the funds for that purchase.
Those funds are being borrowed for the purpose of buying an income producing asset- the rental, so are deductable.
The funds are then paid to you for the sale & you use them to buy your home.

The other thing about losses & the new LTC system is that you can only claim losses to the extent of your personal liability or investment in the company, ie only the amount you have invested into the property/ company plus any loans you have personally Gauranteed. This can be an issue for a trust.

Like Keys says- talk to your accountant, it is important that it is done correctly.

[Property Man]

Not sure what you answered Keys was what they were getting at. I may be reading wrong but I didn't read they wanted their home they will be living in to be tax deductible?

Regards
Aaron

[Keithw]

No I didnt read it that way either- they want the place they are currently in to become a rental, but any borrowings they have for it at present (apparently 10%) will not be deductable because they were not borrowed for the purpose of making an income- they were borrowed for their PPOR.
So even though the place becomes a rental, the loans for it are not deductable.

If they simply go out & borrow (against their equity in their current place) it will be deemed as being borrowed for the purpose of financing their own PPOR & not deductable, even tho in theory it is effectively to get equity out of the rental so it can be used in the PPOR.

The borrowings have to be restructured to be for the purpose of purchasing the rental

[Keys]

We are planning in July to rent out our current home which is in my wife and my joint names and buy on using the 90% equity. I appreciate we will need to have the home market valued and intend to place into a new LTC on renting with our effective interest being a 50/50 share split. Our intention was to fund it with 100% borrowings to maximize interest tax deductions, our economic exposure would be 100% to the bank.

Not sure what you answered Keys was what they were getting at. I may be reading wrong but I didn't read they wanted their home they will be living in to be tax deductible?

I thought it was clear. So, since it obviously wasn't, it's a visit to an accountant for them.

[spaceman]

that just isn't right.

No I didnt read it that way either- they want the place they are currently in to become a rental, but any borrowings they have for it at present (apparently 10%) will not be deductable because they were not borrowed for the purpose of making an income- they were borrowed for their PPOR.
So even though the place becomes a rental, the loans for it are not deductable...........

It doesn't matter that the funds were originally borrowed for a PPOR, if the use of the house changes, (to become income producing) then the loan becomes deductible.

Simply put...... expenses incurred producing income are claimable. The ex-PPOR is now producing income thus the expense of the mortgage is claimable from when that income started

I thought since Xris left that this error was dead and buried

Cheers
Spaceman

[essence]

Disclaimer , I'm NOT an accountant, so obviously the following comments are MY OPINION ONLY.

As everyone knows expenses are non-tax deductible on your PPOR.

When the ex-PPOR is re-financed, but the names on the title don't change, and then the owners then use the money to purchase a new PPOR, the "new" $ ARE NOT TAX DEDUCTIBLE.

It is the purpose of the borrowing which does or doesn't make the loan deductible.

Now I'm a little vague on this portion SO SEE AN ACCOUNTANT but I think it goes something like this.

Sell the ex-PPOR to a company that yourself/spouse are shareholders. The company borrows money from the bank to purchase the property from the owners (yourselves). The property MUST have a registered valuation so that the sale looks kosher to the IRD, if you are ever queried.

When the "sale" goes through, the new debt belongs to the company. The company has bought the property of the past owners. The ex-owners have money in their pocket to do with what they want - ie by a new PPOR.

Pretty much no different than if you had sold the ex-PPOR to an absolute stranger. Only this time you MUST be very particular about the process.

I STRONGLY ADVISE YOU TO PAY FOR ACCOUNTANCY ADVICE. You only have one chance to get this right. A few hundreds $'s now are much better than penalty interest accrued to the IRD in the future.

[Keithw]

From the IRD website - as usual, as clear as mud

What you can claim



The following expenses can be deducted from your rental income:

• rates and insurance
• interest paid on money borrowed to finance your property
• agents fees and commission relating to the rental of the property
• repairs and maintenance (except if they substantially improve the property)
• motor vehicle and travel expenses
• legal fees for arranging the mortgage or finance to buy the property
• from the 2010 income year and beyond:
  • legal fees for buying and selling a property can be deducted. This is provided your total legal expenses for the income year, including the fees associated with buying and selling a property, are equal to or less than $10,000.
  • before the 2010 income year legal fees for buying and selling a property are not deductible
• mortgage repayment insurance
• accounting fees for the preparation of accounts
• depreciation on the building prior to the 2011-2012 income year.

If you are a residential rental dealer or speculator as well as the above expenses you can also claim the cost of the property in the year you sell it.



What you can't claim

Capital or private expenses can't be deducted from your rental income. Capital
expenses are costs you incur to buy or increase the value of a capital asset.
Private expenses are incurred for your own benefit and are not connected with
producing taxable income.


The following are non-deductible expenses:

• the purchase price of a rental property
• the capital part of any mortgage repayment(s)
• interest on money which you borrow for some purpose other than financing the rental property, even if you use the rental property to secure such a loan
• any repairs and maintenance that go beyond replacement and are in fact improvements to the property
• real estate agent's fees incurred as part of buying or selling the property
• the cost of making any additions or improvements to the property.
• depreciation on the building from the 2011-2012 income year.

For the 2009-2010 income year and beyond, a deduction is available for legal expenses incurred in acquiring a capital asset that is used to derive taxable income. This is provided your total legal expenses for an income year are equal to or less than $10,000.

[essence]

Hi Keithw

Want to check that "property" link in para 1 please?? It's defaulting to the PropertyTalk website, but I think it's meant to default to the IRD website.

Normally, I'd just change the link but I won't deal with ANYTHING in regards to the IRD!!!

[Keithw]

Done.
not that it is a lot of use (the so called glossary), it just came across when i copied the stuff from the IRD site.

understand your retiscence to mess with IRD

[spaceman]

The important bit here is the CHANGE of use of the property FROM PPOR TO IP. Once the use of the property changes the loan becomes deductible.

I think essence has summed it up so well, as to remove the need for an accountant .....much better to have a new loan of 100% of the value being deductible than the old loan of only 10% of the original value...... if you don't understand what essence was getting at, then for sure you need to get professional advice.

Cheers
Spaceman

[Gwenn2011]

See an accountant .. it's what we've done when we purchase our rental property. It helps a lot

[Rosco]

Property A is current house
Change Property A to rental
Then buy new personal house, Property B.

1) If just start to rent Property A, then whatever the original mortgage is will still be claimable. If you increase the mortgage, but don't sell to new entity, then new mortgage won't be claimable, as not to buy rental. Original still will be

2) If sell (after 1/4/11) to QC, normal company or Trust, then seperate entity for tax purposes, so purchase entity could borrow up to valuation and interest will be claimable. BUT if operating at a loss, none of these entities can transfer the loss to your personal name.

3) If sell (after 1/4/11) to LTC, for tax purposes the same as selling to yourself (presume personal shareholding). There same as point 1 above, no deduction for any extra mortgage.
One advantage of LTC is that loss is transferred to shareholders, and can offset personal income

There are also some further tricks that can be used after 1/4/11, so that you can get the increased tax deduction and offset it against personal income.

I suggest talking to a property accountant.

Ross