How should I structure an investment purchase?

Question from Lorraine updated on 1st July 2009:

We have a mortgage free joint family home and are looking to buy a bigger family home which I would like to put into a trust. We can purchase without having to sell our current house first, which I am considering. If our current house proves hard to sell in the current market, we have the option to rent it out. With it being mortgage free, there are possibly no tax benefits to this unless we can transfer to the trust at market value and split the remaining mortgage by say government valuation. Is this feasible? Would an accountant set all this up?

Our expert Mark Withers responded:

This is a fairly classic dilemma. If you borrow money to buy your new home and rent out your old freehold one none of the interest is deductible against the rent from the old property. This leaves you servicing the new mortgage and paying tax on your rent. To gain an interest deduction you must be able to show that borrowed money was used to buy the rental property.

Note, which property secures the loans is not relevant to the interest deductibility. If you formed a LAQC to buy your old house with borrowed money you would achieve deductibility of the interest within the company. Any tax loss can then be attributed into the shareholders tax returns. The money you get from the sale of the old property to the LAQC can then be lent to your trust to buy your new home with a lower bank loan. Problem solved! You would use an accountant to plan this and a lawyer to do the conveyancing.

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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