Extracting equity from NZ?

Question from Anne updated on 16th September 2013:

My husband and I bought our family home in Christchurch in 2003. We took out one mortgage to buy the place and in 2006 we took out another one to finance some renovations. Following the 2011 earthquake, we moved to Australia and rented our house out. We have been filing non-resident tax returns and have kept the house in our name. We want to keep the house but release some equity so that we have a deposit for a house in Australia. We are thinking of setting up a company in New Zealand, selling the house to the company and then using the sale proceeds as a deposit. We are not concerned with off-setting any losses as we do not have any other income in New Zealand. Our aim is solely to release some money for a deposit in Australia while retaining the Christchurch house as an investment. Due to the second mortgage, we are not making a profit from the rent anyway. Would the IRD consider the restructure dodgy at all and/or is there another way of releasing the equity?

Our expert Mark Withers responded:

You have indicated that the two existing mortgages on the property are already at a level that creates a tax loss on the rental arrangement. This would suggest that the property is quite low yielding especially if there is still equity in the property. You don't need to restructure the ownership to extract equity for the deposit in Australia, you can simply borrow against the asset as it is in your own names. The only debate would be on whether additional interest would be deductible. Quite honestly, given losses are already being produced I would question the sense of a corporate restructure, especially when you are in Australia. The extra losses, if successfully engineered around the tax avoidance provisions would produce no additional tax refund in New Zealand because you aren't paying any tax in NZ to get any refunded. The situation in Australia is also complicated because losses to you as individuals would be deductible but it is unlikely NZ corporate losses could be offset against personal incomes in Australia even if the company successfully applied for LTC status in NZ. There are also thin capitalisation rules that limit interest deductions for non-resident investors if their debts exceed 60% of property value. The other option to release the equity is to sell the property, pay off the mortgages and use the surplus to buy in Australia. Whilst I appreciate you have indicated a desire to keep the property, you are clearly putting down roots in Australia and accordingly holding loss making property in NZ may need a rethink.

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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