Moving debt around

Our Experts Answer:

Dear Jeff, it is likely that the bank will have cross collateral security over both properties for all the debt plus your personal guarantees so from a security point of view it is unlikely that much can be achieved by altering the mix as you suggest. From a tax perspective, deductibility of interest is determined by the use to which the borrowed money was put, so for interest to be deductible the borrowed money must have been used to fund the acquisition of the property that is producing taxable rental income. Your proposal to refinance more of the personal debt onto the rental property does not alter the use to which the money was put so does not give rise to the ability to deduct more interest. I do not see the refinancing exercise triggering any income tax liability though. It may be possible to restructure the overall arrangement to give better tax efficiency though, that would probably involve the creation of an entity that debt funds the acquisition of the rental property so that you free up capital to repay the personal debt. Any restructure like this must be undertaken only after seeking professional advice as it must not constitute tax avoidance, a topic which is keeping IRD particularly exercised at present.