Is LTC necessary?

Question from Jayne updated on 9th June 2016:

We have moved to the North Island and are currently building our family home. We still have our property in the South Island and are considering renting it out. We have been advised to set up an LTC.

But my question is do we need to do this?

We have no intention of purchasing any further property. We simply do not wish to sell our South Island home in case we wish to return there in the future. What is our best option for accounting and tax purposes? We would need to top up the rental income to cover the mortgage and etc

Our expert Mark Withers responded:

The answer depends on the amount of equity you have in the original property. This is because the interest deduction available against the rent is limited to the remaining loan that purchased the original home now rented - regardless of what property provides the mortgage security for the lending.

None of the interest on the new home loan is deductible against the rent from the old property. So the more equity you have in the old property the higher the tax bill from renting it that can't be sheltered by the new interest cost.

The solution is to restructure the old property by sale to an entity - perhaps an LTC - that debt funds the purchase of the old property. This frees up equity to put into the new home and reduces the private non deductible debt. So the key point is interest deductibility. This is determined by whether the borrowed money was used to buy the rented property, not by which property secures the loan.

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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