Deductibility "classic dilemma"

Question from Stephen updated on 15th October 2013:

I have two freehold properties that I would like to mortgage against to purchase a third property, moving into the latter. The other two will become rentals. How can I do this and claim tax deductions on the interest of the two rentals?

Our expert Mark Withers responded:

This is a classic dilemma. The fact that the rented properties are to secure the debt does not mean the interest is deductible. To be deductible there needs to be a link between the borrowed money and the acquisition of an income earning asset i.e. if the borrowed money is used to buy the private home none of the interest is deductible against the rent from the original houses. One solution would be to form a look through company (LTC) that would borrow to acquire the properties that are to be rented. The proceeds from the sale of these properties to the LTC would then provide the capital for you to acquire the private home. The LTC deducts the interest costs and assuming a loss is generated this can be offset against the shareholders other income subject to the LTC loss limitation rules.

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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