Refinancing after 'deemed sale' from LTC

Question from Carla updated on 14th August 2013:

We are selling our rental property to ourselves to live in. 'A deemed sale' my accountant advices. When we pay off the mortgage for this property, we would be running at a profit . There are still two rental properties left in the LTC. Ideally we would like to refinance (in other words not reduce the mortgage as much as the initial purchase price of the to be sold property), the bank has no problem with this because there is enough equity but how does the IRD go about refinancing?

Our expert Mark Withers responded:

Standard closed companies enjoy automatic interest deductibility provisions but the old LAQC and new LTC entities will need to apply the traditional rules of deductibuility to any interest costs. The IRD has issued some guidelines that offer some assistance. Essentially, it is reasonable to refinance "contributed capital" that shareholders have previously lent the companies. In the case of a LTC this could also include realised capital gains that remain in the company. However, money borrowed to distribute dividends from unrealised asset revaluations does not give rise to deductions for the resulting interest costs. So to determine the extent to which you can refinance you will first need to calculate your level of contribute capital in your shareholder current accounts. This should be calculated after the impacts of the related party sale transaction you are contemplating. You accountant can probably assist by projecting this position for you once all the facts are known.

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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