Q: I have an offset mortgage on my owner-occupied property, which is currently offset by savings. I now plan to rent my property and use some of my savings to buy another property to live in. Will that offset mortgage now become tax deductible as it was originally used to purchase the house that has now become a rental?

A: If by offset mortgage you mean a loan facility that remains drawn but has its interest costs reduced by offsetting the interest on deposit funds held elsewhere, rather than a line of credit facility that you have repaid but maintained, then yes, my view would be that the interest charged on the loan balance that has always remained drawn and remains associated with the house acquisition, will become deductible when there is a net cost to servicing that debt, and when the property that was funded by that drawn balance is rented.

This is because the actual debt that funded the property was not repaid. If you had used the savings to pay down a line of credit then redrew that line of credit and used the redraw to fund your new home, there would be no deduction. Always remember interest deductibility is not determined by what the security is for the loan, it’s determined by whether the borrowed money was used to derive an income to provide a nexus between the interest cost and the rental income.

Mark Withers

pkfwt.co.nz