Transfer equity from rental to personal property (not LTC etc)

[Recalcitrant]

First time I've asked a question - but read this site for many years - and I can't seem to find a similar thread.

We have about $200,000 equity in a rental property, and very little equity in our new personal property.
I would like to "transfer" some equity from the rental, to the mortgage on our personal property.

NOTE: Both the rental and the personal properties are owned by us (my wife and I) - with no LTC or other company structure in place.

Can I simply ask the bank to "re-structure" the mortgages so we have more equity in our personal property/mortgage? Will this incur tax? Or cause some other issue we should be aware of?

Many thanks!

[ScottSI]

Short answer - NO

Interest is only tax deductible if the money borrowed is for investment. So adding 200k to rental mortgage and putting on own is not investment so cannot claim the interest for the new 200K against the rental.

Basically you need to restructure your affairs.

Sell your rental (eg. mortgage 200K) to a new entity (with a reason) at registered valuation price eg. 400k to this entity (trust or company). The entity pays you 400k (bank borrowed) and you pay off rental old mortgage (200K) and the other 200K goes to your personal property mortgage.

Not knowing your exact situation, but you probably will also now become negatively geared on your IP and have to shift money from your own income to cover the rental operating costs.

Catches: Cost of transfer, really should get a valuation done on rental which costs, cost of new entity and it's operation, does this really fit your bigger plan, what is the real advantage and is it worth it?

You need to talk to your accountant also as I know nothing, hope that helps.

[Rosco]

Great answer Scott, apart from the part where you know nothing, as you have pretty much got it right. There is a couple of catches to ensure it is done correctly, but the basics are in Scotts answer. Main part, is that you can't just borrow the $200k as the reason for borrowing is to reduce your personal house debt, so the purpose is private and therefore the interest is not claimable. It is amazing how many people get this wrong!

I presume you used to live in the rental, and it used to be your personal house?

If so, is it actually a good rental?
- does it require high repairs and maintenance?
- does the rent pay for all the expenses, including interest on a 100% mortgage?
- What about if interest rates rise?
- Does it have good potential capital gain, or opportunity to improve?
- Would you be better off selling this rental, and buying a new rental purchased specifically as a rental?

For a restructure you would generally use an LTC, but depending on your circumstances a Trust might be better if the rental has good cashflow or if you have personal risk.

Ross

[DaveW]

I would had thought the short answer is YES, if the bank is refinancing $200k then you can put it on the home loan.

However (as Scott explained) you are not gaining anything, unless.... the home loan rate is higher than that on the rental or; if you can use the $200k in higher yielding investments or; if you use it as a deposit to buy more property.

Personally, if I was looking to reinvest it, I would take the $200k and park it in another bank on a term deposit because you never know if the bank will withdraw the offer of refinance.