Arranging debts to reduce tax liability

Question from hugh updated on 22nd January 2008:

I have two tax inquiries If $70,000 bank debt is incurred, ($200,000 on purchasing a commercial property as investment on rental income and $500,000 on purchasing a residential home), how can a family arrange these debts to reduce their liability to tax? Can the debt be used to offset income tax from employment and rent? How would setting a trust reduce tax liability of a family?

Our expert responded:

Generally, a mortgage on your personal home is not tax deductible if it was taken out with the purpose of buying the family home. However, if a mortgage is taken out against a family home with the purpose of buying investment property (residential or commercial), then the interest will be tax deductible. In your case, it will depend on the value of the commercial property. If the property you are purchasing is only $200,000, then you can't do anything further. However, if the property is more than $200,000, it will depend on how the bank structures the loans. One thing to be aware of is that the bank may seek to link the two properties with cross guarantees, which is a situation you need to be careful of. Whether or not expenses from the investment can be offset against personal income will depend on the method of ownership. If the property is owned in your personal name or an LAQC and there is a loss, then the loss can be offset against personal income. If the property is owned through a trust, then any loss must be carried forward and offset against future income. You will need to decide which is more important - tax benefits or the asset protection of a trust.

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Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.


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