Tax fishhooks for new property

Q

We bought our current home in 2018. We will be buying another home soon and renting out our current home. From my reading of the IRD website, I understand that from April 1 this year we will be able to claim 100 per cent of the interest on the mortgage on that home as an expense. Am I correct? Are there any fishhooks?

A

Yes, that is correct, the coalition government has phased back in the tax deductibility of interest on borrowings for residential investment property. Fishhooks, yes … only the interest on the debt that related to the original purchase of the property is deductible against the rent. Given you purchased the home in 2018 you will likely have equity in it. Any money borrowed to buy the new home, even if the old one provides security for the borrowing, is non-deductible. You may like to consider restructuring the ownership of the old home with the possibility of moving equity into the new house and creating an arrangement where more debt is associated with the restructure entity acquiring the old home for rental. Equity levels and the amount of new debt you need for the new house will determine if this is worthwhile. Note that restructuring can trigger bright-line issues, so seek advice on your specifics. Note also, we still have residential loss ring-fencing rules that prevent rental losses being offset against income other than other residential rental income.

Mark Withers
pkfwt.co.nz