Can I claim tax deductability if I mortgage my rental?

Question from Mark Young updated on 29th August 2008:

I have a mortgage-free investment flat,and want to go half-shares in a family home with my partner. Will the IRD let me claim tax deductability if I mortgage the rental to finance the home that we will live in? (My partner may also rent-out her home, and mortgage that to finance the new property.)Thankyou

Our expert responded:

In a situation such as this, the interest on the new loan would not be tax deductible as the money has been borrowed to fund a private non-business purchase.  In order to make the interest tax deductible, I would recommend that an entity such as an LAQC or Trust is set up and the property transferred to this new entity at the current market value.  The new entity will then go and borrow whatever money it can to finance the purchase so that it can pay you out.  This will make the interest tax deductible.  However, the downside is that there will be a depreciation recovered issue which may mean that tax will have to be paid.  I suggest speaking to an accountant to discuss your situation more fully.

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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