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  1. #1

    Default Renting out my home for a year. Should I put it in a trust?

    First time landlord here. Interested to get some additional advice on what is needed to ensure that I can deduct mortgage interest from rental income.

    Just over a year ago, I bought my first home in Wellington and have been living there since. Recently though I got contracts up north and won't be near Welly so I will be renting out the whole (2-bed) house, until this time next year.

    An accountant advised me that, because I bought the house as a first home buyer, Kiwisaver included, and intended to live there, I cannot deduct mortgage interest from rental income and that I need to form a trust, to fix this. Is this what you would expect? Does it perhaps depend on the specifics of my home loan agreement with the bank?

    It's of course past the 6 month req for Kiwisaver use and I can prove that I've moved to a new situation via a tenancy agreement, so I'm uncertain of the need to set up a Trust.

    Thanks!
    Amanda

  2. #2
    Join Date
    May 2007
    Location
    Hamilton
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    Default

    Hi Amanda,

    That isn't right! If you used the loan to buy the property, and then it becomes a rental. You will need to return the rent as income, but also will be able to claim the expenses including the interest on the loan.

    A Trust could give you other advantages, depending on your situation. But presuming you are a new home buyer with a big debt, I doubt I would be recommending a Trust, unless you and your partner have high risk of being sued.

    If you Private Message me, with your details, we can organise an easy 5-10 free chat to clear this up. Normally we would only give advice through an initial meeting where we charge for our time, but in your case, it should be really simple to clear this up for you.

    The Kiwisaver part is meaningless. Tax and Kiwisaver are two different things.

    Ross
    More Profit from Property? Learn How HERE.
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  3. #3
    Join Date
    May 2004
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    2,272

    Default

    What Ross said. The IRD booklet Rental Income IR264 is very helpful and covers things like part of year renting, moving back into own home after renting, and more.

  4. #4

    Default

    Thanks both, this is definitely what Iím hoping for, as setting up a Trust otherwise seems unnecessary at this point in time.

    I found this by Mary Holm in her NZ Herald column on the topic of renting out oneís first home, which is pretty much exactly what my CA said:

    ďFirst, you'll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.

    And you won't be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.Ē

    I talked to my bank, who said not much changes if I go ahead with this plan other than that I am restricted in future borrowing (which Iím not planning to do). So Iím still unsure why this advice is given?

  5. #5
    Join Date
    Sep 2004
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    Hastings
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    I would be careful of anything a newspaper correspondent says, Amanda.
    First, you'll have to pay tax on any profit on renting out your house
    Doh! No kidding. What a revelation that is.

    And you won't be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.
    That is simply not true. You are having a change of use, which is usually no big deal.

    I know nothing about Kiwisaver and further borrowing complications of your proposal, if any.
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  6. #6
    Join Date
    Oct 2013
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    Default

    Quote Originally Posted by amandalllr View Post
    And you won't be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.
    As above have said, not correct. This is something I had previously believed (and had an argument on the forum three or four years ago, which I eventually conceded after researching the law) so it's not an uncommon mistake.

    You took out the loan to finance the property. Not 'your home', but 'land and buildings located at XX St'. While it's your home, there's obviously no deduction, but once it becomes a rental, there's a loan there which was raised to purchase the property. That's deductible.

    Note, though - that if you ever topped up your mortgage after purchase, for something else, that part isn't deductible. IE, initial mortgage $300k, but three years later property doubled in value so you felt rich and topped up $50k for a new car and $25k for a holiday, that $75k (approx 20%) of the mortgage still wont' be deductible if you make it a rental. It's in that instance you'd need to restructure to a trust or LTC.
    AAT Accounting Services - Property Specialist Accounting - AATAccounting.co.nz
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  7. #7

    Default

    Got it, thank you. I found the thread you mentioned Anthony and the only question is why this view is held at all.

    Perhaps my CA saw I was not sold on setting up a Trust for the other reasons? Time to find a new accountant.

  8. #8
    Join Date
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    Quote Originally Posted by Anthonyacat View Post
    As above have said, not correct. This is something I had previously believed (and had an argument on the forum three or four years ago, which I eventually conceded after researching the law) so it's not an uncommon mistake.

    You took out the loan to finance the property. Not 'your home', but 'land and buildings located at XX St'. While it's your home, there's obviously no deduction, but once it becomes a rental, there's a loan there which was raised to purchase the property. That's deductible.......
    Do you think there is confusion in some quarters between net rents (income less expenses) which is taxable if positive, and capital gains tax on sale? The latter rests on intent when purchasing and/or whether the owner meets the IRD definition of a trader, the former not so.

    If there is that confusion out there, I'm surprised that a bank and Ms Holm got it wrong.

  9. #9
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    Default Confusion? Ignorance? Well-informed self-interest?

    Quote Originally Posted by artemis View Post
    Do you think there is confusion in some quarters between net rents (income less expenses) which is taxable if positive, and capital gains tax on sale? The latter rests on intent when purchasing and/or whether the owner meets the IRD definition of a trader, the former not so.

    If there is that confusion out there, I'm surprised that a bank and Ms Holm got it wrong.
    Journalists and newspaper columnists often get it wrong.

    As do the W'gton woodenheads who do not understand or appreciate the difference between an investor, a land banker, a developer and a speculator, etc.

    The relatively recent, so-called "bright line" test removed the uncertainty for those with half a brain.

    There is a difference between "when purchasing" and actual usage.

    Keep in mind that many SMEs use the domestic home collateral as security when borrowing for business purposes.
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  10. #10
    Join Date
    May 2007
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    Hamilton
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    Default

    Quote Originally Posted by amandalllr View Post
    Got it, thank you. I found the thread you mentioned Anthony and the only question is why this view is held at all.

    Perhaps my CA saw I was not sold on setting up a Trust for the other reasons? Time to find a new accountant.
    Hi Amanda,

    Most accountants specialise in business, farming or auditing. Property is just a side line for them. So often they don't know all the rules! Plus many accountants have little knowledge or experience at all. Did you know there is nothing stopping you setting up as an accountant tomorrow! That is why I suggest chartered accountants!

    If you are looking for a new accountant, first thing I would do is look at websites. If the main page of the website talks about business accountants, or business advisors, or farming, or auditing, then I would keep looking until you really find someone who concentrates on property!

    In your case, keeping things very simple is probably the best way, as it is only short term.

    Ross
    More Profit from Property? Learn How HERE.
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.


 

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