Maximising interest deductibility?

Question from John updated on 20th November 2013:

I own an existing property without a mortgage. If I purchase a new home for my own use that requires a substantial mortgage then is there any way I can structure ownership so that the new borrowing is attributed to the old property (now be the renter)? Thanks.

Our expert Mark Withers responded:

Dear John, this is a common problem, unfortunately deductibility is determined by what the borrowed money is used for rather than by what it is secured against. To ensure deductibility, the borrowed money must be used to buy the income earning asset. This can be restructured by establishing a new entity that will borrow money to buy your old home for the purpose of deriving rental income. This is often done with a look through company (LTC) because any potential losses can be offset against the shareholders personal income subject to the LTC loss limitation rules. This restructure will leave you with cash from the sale of your old home to put toward the new with the company meeting deductibility criteria for the interst cost it incurs. To reduce the potential for the arrangement being viewed as tax avoidance the transaction should be commercial in nature and transfer prices should be set in accordance with arms length registered valuations of the property to be restructured.

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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