Best ownership structure?

Question from Chris updated on 16th March 2015:

Hi I am about to complete the purchase of a rental property and I would like some advice about how best to structure this purchase. I have spoken to several accountants but none seem to be very interested or helpful about my situation. I currently own one house with a mortgage, I would like this to become the rental property. It is valued at $480,000 and tenants have signed up to rent it at $500 per week. I will move into the new house valued at $430,000 bringing my current boarders with me who pay $300 a week. I am looking at converting the areas under both houses in to a self-contained units or extras bedrooms with bathrooms in the future to bring in more income. I do not intend to work full time anymore and expect to earn around $40,000 or less from wages this year. I have heard lots of different things about LTCs being great or not needed at all. I am the sole owner and just looking for the best way to structure my ownership of the properties.

Our expert Mark Withers responded:

Dear Chris, the key piece of information missing from your statement of facts is the amount of debt you have associated with your current home. If you have substantial equity in it a restructure may be required to make the arrangements tax efficient. This is because you intend moving into the home that you are about to debt fund and rent the home in which you presumably have some equity. To the extent that the debt for the new purchase funds your private and domestic living the interest is non deductible. One possible structure would be to sell the old property to a LTC that debt funds the purchase. This releases your equity and enables you to apply it to the new property purchase. With regards the new acquisition my advice would be to plan the structure around the properties predominant purpose. If it is primarily a home for yourself use an ownership structure appropriate for this, this could include a trust or personal ownership but not a company. The fact that you intend deriving rental income from your new home with boarders and ultimately by creating self contained accommodation will trigger some tax compliance issues. The IRD guidebook on rental income IR264 contains a useful summary of the rules associated with boarders, flatmates and self contained units in homes.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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