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  1. #1
    Join Date
    May 2012
    Posts
    398

    Default Using equity in rental to buy a section for PPOR

    I currently own a house that I'm renting out, effectively an accidental landlord due to relationship break up and then CHCH quakes. I've got $130k equity in it (mortgage $370k), and it was valued at $500k last May when I purchased it; probably be worth more now in the CHCH market since it's on TC1 land out west.

    It should be getting EQC done later this year, and then I plan to sell it early next year, hoping for $530k or more. Then I figured I would build a new energy-efficient house as my PPOR (currently I'm renting myself) since IMO it doesn't make sense to buy in the CHCH market with the interest rates being so low at the moment.

    So what I'm wondering is how could I go about using the equity in the rental as security against a section? Apparently sections generally need 20% deposit, and I'm looking for a section less than $250k, ideally around $200k.

    In practice, how can this be structured so that I can continue to claim 100% interest from the rental mortgage as tax deductible? For example it could be possible (bank willing) to increase the rental mortgage by $40k to use as deposit for the section, and then get $160k on a mortgage against the section. But if I did that I'd no longer be able to claim 100% of the interest from the rental against my tax.

    So how does this generally work? What are the risks? Any fish hooks?

  2. #2
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,562

    Default

    You can do a full restructure, but this generally costs several thousand. I'm not sure the benefit would be more than the cost if you are going to sell shortly. Ie say $2,000 legal at least as cost. Interest on $40k is only around $2,000 per year. Even at 33% tax rate this only gives $660 tax benefit. Need at least 3 years to break even.

    Also watch holding costs on section, if plans change.

    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.

  3. #3
    Join Date
    May 2012
    Posts
    398

    Default

    Being a complete novice, what are "holding costs"?

    Also the gist of what you're saying is that any other structure than simply upping the mortgage on the rental would need to involve lawyers?

  4. #4
    Join Date
    Dec 2010
    Location
    Cambridge, NZ
    Posts
    1,374

    Default

    Interest (whichever entity incurs it) and rates on the section are the holding costs in question

    Yes to the second question. The easiest way to access the equity of the rental is by having the rental entity guarantee the obligations of the entity/person that owns the section.....but that doesn't help with deductability of loans.

    Agree with what Rosco said about the value of restructuring if you're selling shortly...

  5. #5
    Join Date
    May 2012
    Posts
    398

    Default

    Thanks. For a $250k loan at 5.35% (my current floating rate) it ends up being ~$1,100 per month in interest, which is a pretty big cost for securing the "perfect" section if I wouldn't even be in a position to start building on it for 10+ months.


 

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