Old house, new questions
Question from Marge updated on 22nd February 2011:
Our expert Mark Withers responded:
The problem with using your equity in the existing home to borrow money to buy the new home is that none of the interest is tax deductible against the rent because the money was used to buy the new home rather than the rental property. Note, which property you use as security is irrelevant to the question of deductibility. This problem has traditionally been solved by selling the old home to a LAQC which borrows to buy its rental property. Any tax losses attribute back to the sharholders who can typically use the losses to save some tax.
LAQC companies are getting the axe though on 1 April so it is likely you would need to use or transition to one of the new "Look Through Company" structures to achieve a similar outcome, note, the LTC has a loss limitation that will require you to guarantee the companies bank debt if you are to be able to extract the losses. You should also review the rental yield against the properties current market value and compare this return to the interest rate on your mortgage before you make a decision to retain it. No amount of tax refund will turn a loss into a profit.
Ask yourself this question, if I was looking for a rental property would my old home fit my criteria? If it really doesn't stack up as a rental you may be better to meet the market and sell it.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.