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  1. #1

    Default R/C for investment property

    Newbie question. Is it advisable to use the investment property revolving credit account (under personal name) to serve the purpose as personal daily transactional account? i.e. for EFTPOS purchase, pay off personal credit card bills etc? Any complication with IRD or tax etc?

  2. #2

    Default

    As long as it is logged correctly ( Shareholders drawings etc) when it comes to tax time, I don't see a problem with it, I do the same thing every now and then.

  3. #3
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,628

    Default

    I would always recommend keeping business and private seperate. From your post it sounds like your rental properties are in your personal name, so technically you could use the one personal account, but it gets very messy.

    With revolving credit facilities, the interest is deductible based on the what the money is used for. If you start to use it for business and private it gets very very messy, and very difficult to work out how much interest is claimable. You would have to be constantly reworking out what the business or deductible % is. ie
    - your private facility is $55,000 OD
    - You then use $30,000 as a deposit on a rental. So now 30/85 is deductible interest or 35%.
    - You then pay of $5,000 as your wages come in , so down to $80k overdrawn
    - You then pay your personal house loan from this of say $1,000 and pay of your monthly credit card of $2,000. This $3,000 is personal, so now your have; $55k that was personal, less portion of $5k repaid say $3,000 to keep things simple, plus $3,000 new. So $55k out of $83k is personal, or 66% private. (34% interest claimable)
    - Then you buy a personal boat for $10k. So now $65k out of $83k. So can claim only 22% of interest.

    As you can see this gets very awkward and quite complicated.

    I would suggest if you want to use revolving credit facilities, have one that is solely for your rental business. This was all the interest is deductible, so it keeps the administration much simplier!

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  4. #4
    Join Date
    Jul 2010
    Location
    Auckland City, why invest else where?
    Posts
    984

    Default

    Quote Originally Posted by YoyoKiwi View Post
    Newbie question. Is it advisable to use the investment property revolving credit account (under personal name) to serve the purpose as personal daily transactional account? i.e. for EFTPOS purchase, pay off personal credit card bills etc? Any complication with IRD or tax etc?
    No it is not advisable to use RC on investment property for personal transactions.

    Your accountant will "love" you, and "happily" charge you LOTS of extra fees for the extra work you put them through!

    Keep your personal expenses separate. If you touch your investment property RC, then withdraw a whole lump sum amount, say $1000 and deposit to your personal transaction account before use.

  5. #5

    Default

    hmmm...thanks for all your reply.... have to think hard what to do...

  6. #6
    Join Date
    Mar 2013
    Location
    Auckland
    Posts
    1,678

    Default

    I have a RC account for the LTC and an everyday account for my personal use.

    On payday, I transfer a lump sum to the RC account as a loan. Then when I need money for my personal use, I transfer some back as a partial repayment.

    This way, I keep my accounts separate, there is a paper trail of loans/repayments and I get to make use of my personal funds to maximise my RC facility to minimise my interest costs.

  7. #7
    Join Date
    May 2012
    Posts
    402

    Default

    As per others, definitely keep them separate, just because you have to 'track' what is personal and what is rental use. Not sure whether what sidinz is doing is strictly by the book either, but it sounds like a lot of work.

    Having said that, I'm not sure how Kiwibank's Offset mortgage (and BNZ TotalMoney) work. For those mortgages, the lending is strictly for the rental property, but your total funds are used to reduce the interest charged on the mortgage. In that case, I do think you would need to do any special tracking of your private funds, because they were always in a separate account from the mortgage, and their presence simply resulted in 'less' interest being charged on the rental mortgage.

    I'm not in a position to move my mortgage to Kiwibank / BNZ, and am planning to sell the house early next year anyway, so I haven't done any investigation into this possibility.

  8. #8
    Join Date
    Mar 2013
    Location
    Auckland
    Posts
    1,678

    Default

    Quote Originally Posted by Lanthanide View Post
    As per others, definitely keep them separate, just because you have to 'track' what is personal and what is rental use. Not sure whether what sidinz is doing is strictly by the book either, but it sounds like a lot of work.

    .

    Not sure why you think it's a problem. People have been making loans to their businesses to improve cashflow for eons.
    And with Internet banking, it's a couple of clicks. Not what I'd call hard work......

    (But actually, in my case, making the loans has been a necessity as the mortgage broker stuffed up when the borrowing was arranged and my number-crunching didn't allow for the rentals to cover large principal repayments so early in the piece and the bank doesn't want to change things. So in order to cover the principal repayments I have to lend the LTC the money.)

  9. #9
    Join Date
    Nov 2006
    Location
    Cyberspace
    Posts
    5,806

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    Quote Originally Posted by sidinz View Post
    Not sure why you think it's a problem.
    The loan itself is not the issue. It is the deductability of interest where you have fun.

  10. #10
    Join Date
    May 2012
    Posts
    402

    Default

    Yes, as per Keys, it's the interest deductability. Here's a thread I found on PT about it: https://www.propertytalk.com/forum/sh...redit-mortgage
    I also made a thread of PT about a year ago and got the same answers: https://www.propertytalk.com/forum/sh...-insurance-etc. At the time, I googled up some advice from Australia that said it definitely was a problem, and as well an article from NZ that said IRD take the same view.

    Basically you can claim interest expense on loans that were for the purpose of buying the rental property. But if you use the credit facility to pay for things that aren't the rental property, then suddenly the interest on that lending is no longer tax-deductible.
    Quick example: You have a $100k loan. In month 1 you "loan" $2,000 to it from your personal money. Now the loan amount outstanding on the property is $98k. Then you "repay the loan" from the revolving credit facility, you now have $98k that was used to purchase the property, and $2k that was used to "repay the loan" - the interest charged on this $2k is no longer tax deductible. Continue this for long enough and eventually you end up with a large outstanding mortgage, which IRD considers to have been used to "repay the loans" and not "purchase rental property" and so the interest on the entire thing is no longer deductible.

    Basically it comes down to accounting, but that's how IRD views it. Hence my speculation above that Kiwibank's Offset Mortgage would be an alternative mechanism that achieves the same thing, but keeps the accounting clear and obvious.

    Now one thing that may differ in your case is that you are using a LTC; the thread above talks about "business expenses". "Repaying a loan" to your personal account may count as a business expense and therefore still be deductible; but in simple owner-held rental (as I am doing - accidental landlord following CHCH quakes) this absolutely would not work.
    Last edited by Lanthanide; 17-06-2013 at 10:28 AM.


 

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