Best rental structure
Question from Jason updated on 29th January 2020:
My wife and I currently own two houses under my name. One is our personal home and the other one is rented out. We have owned the rental for five years and our own home for four years.
We are looking at buying another property to live in and renting our current house out. We would like to try and use equity from both houses to decrease our mortgage on our new home.
What would be the best structure to own our rentals in whilst getting the best tax advantage? If we were to use a company structure and sell our properties to the company at market value, what portion of the loans interest is tax deductible if any?
Our expert Matthew Gilligan responded:
I see the best structure here involving a family trust and a rental company. You should settle the new home directly into the trust. In order to protect as much equity as possible and have your bank debt structured effectively, you should sell the two existing properties to the company. The company takes on bank borrowing up to the purchase price of the two properties. Interest on all of this borrowing will be deductible as the company will be regarded as having borrowed the money in order to buy the rental properties.
As with all things in tax there are hidden hooks. You have mentioned that you have owned both of these properties for at least four years, meaning that you will not trigger a bright-line gain on sale to the company. However, there are other tax provisions that could see tax payable and you would need to have that checked before you proceed. There is also the possibility of depreciation recovery.
Finally, you need to acknowledge that you will trigger a fresh start to a five-year bright-line clock on transfer. In summary, there is advantage in moving the two existing properties into a company, but you need to tread carefully.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.