Tauranga Property Investor Q&A | Tax Strategies | Ingham Mora
on July 5, 2024 / by Tom Beswick
Question: I own a mortgage free home in my own name. I want to buy a new home and rent out my old house. I will need to borrow to buy the new home. Is there a right way to do this to save tax?
Answer:
There is definitely a wrong way if you want to save on the tax (via achieving a deduction for interest). If you buy the new home and the settlement statement shows that you used the bank loan to directly purchase the new home then there is no way to claim interest on that loan as a deduction against the rental income you’ll earn from your old home. What the bank loans are secured over doesn’t matter – IRD looks at what the loans were used to buy as part of assessing whether the interest is deductible or not.
The correct way to structure this is to ‘sell’ your current home to a new entity – usually a company. The company then borrows up to 100% from the bank to pay you back for the home. The company earns the rental income and borrows to purchase the rental. As the company took a loan to buy a property that will earn it income then it is allowed an interest deduction (80% of the interest is claimable in the 2025 tax year, 100% for the 2026 tax year).
As an example, Beauden owns a home in the Tauranga suburb Otumoetai with no debt. He wants to buy a new home in Bethlehem and rent Otumoetai out. To achieve the best tax outcome Beauden ‘sells’ Otumoetai to All Blacks Rentals Ltd (a new company he forms) for its market value, say $1m. The company borrows $1m from the bank to pay him back. Beauden then uses the borrowed $1m as payment for the new home in Bethlehem. By doing it this way the interest deduction for the company is achieved.
Please note this is a very simple example and does not cover all scenarios. It is easy to muck this up so I recommend getting your Chartered Accountant involved in all cases. Please see our Investment Property Accounting Services to see how we can assist you.
Do you want to optimise your property investment strategy and increase your tax savings? Contact Ingham Mora, your trusted Tauranga accountant, for expert advice tailored to your needs.
The comments in this section are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.