Capital options

Question from Steven updated on 26th August 2014:

We own a house in Lower Hutt and are shifting into Wellington Central. We are contemplating three options. First is to buy in Wellington and sell in Lower Hutt. The second is to buy in Wellington and rent out the house in Lower Hutt. The third is to rent in Wellington and rent out the house in Lower Hutt. We would be grateful to know whether one particular combination, or a financial structure, can offer an advantage over another in terms of tax paid?

Our expert Mark Withers responded:

I'd start by looking at what the net yield is on Lower Hutt, relative to its value. Ask yourself whether you would re purchase it as a rental if you owned Wellington and were looking for a rental. If it doesn't stack up financially, sell it. If it does stack up financially then keeping it and buying in wellington will probably mean a restructure to make it tax efficient. This is on the assumption that all your equity is in Lower Hutt and you would borrow all the money to buy in central. If you don't restructure you will be taxed on the profit from Lower Hutt but get no deduction for interest on debt funding Wellington. A restructure would normally involve selling Lower Hutt to a look through company that would debt fund its purchase so you have your money available to buy Wellington. The problem with renting out Lower Hutt and renting in wellington is that you will be taxed on profit from Lower Hutt but will get no deduction for the personal rent you pay in Wellington. The greatest benefit from renting would simply be if the cost to rent was substantially cheaper than the cost of a debt funded acquisition. You may get lucky and stumble onto a landlord in central Wellington who doesn't understand opportunity cost and is willing to rent a valuable home on a low return, they are out there!

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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