Relocation tax considerations
Question from Vladimir updated on 3rd April 2017:
My wife and I own the house that we have lived in for the past 15 years and a rental property. They are both in Lower Hutt.
A career progression opportunity in Auckland presented itself and I have accepted it. Therefore, the house we live in will be rented out when we leave for Auckland.
We are not likely to buy anything in Auckland for some time, so I wonder what implications this arrangement might have both financially and income tax wise?
Our expert Nick Ashford responded:
Both the financial and income tax impact of your move will be heavily dependent on the loans you have over the various properties, the ownership structure and expected rental yields.
Financially, it is important to ensure you are retaining properties for the right reason. Holding onto an ex-family home can often be the right decision in the long term if you are lucky enough to have a crystal ball that indicates long term capital gain. However, in the short term, an ex-family home does not usually offer significant rental yields when compared to the current market value of the property. Therefore, be sure that you are looking at the property as an investor rather than a nostalgic hoarder.
Income Tax is payable on any rental profits generated by your properties. However, the calculation of any rental profit or loss on your ex-family home can become a little blurry. In particular repairs & maintenance is a commonly critiqued item, particularly as consideration is required for repairs that are due to your own private wear and tear, which would make the costs non-deductible for tax purposes. More importantly is the planning and execution of the ownership and debt structuring of your properties. Interest paid on loans is often the largest deductible expense, and without the correct advice the results can vary significantly.
A common example we see when a property has been the family home for many years is that the original debt used to finance the home’s purchase has been paid down significantly and then refinanced many times over, often for things other than the home i.e. credit cards, cars etc. Although the refinanced debt is possibly secured over the property, the underlying reason (nexus) for the refinance was not related to the home and therefore when the home becomes a rental property that loan is not 100% deductible.
It is therefore important to seek advice and consider possibly restructuring the properties ownership and debt structure to ensure that there is clear link between interest paid and the rental property.Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.