Rental tax obligations
Question from Vonney updated on 15th November 2019:
I have 3/4 equity in my home and I am planning to purchase a small unit as my primary dwelling and then rent out my first home to family. It will most likely be a short term rental for a few years only. What is the best and most efficient way, financially, to do this with regards to tax obligations? I have owned my first home for over five years.
Our expert Mark Withers responded:
Your options are to do nothing but accept that none of the interest on the money borrowed to buy the unit can be claimed against the rent from the previous house, or, restructure the ownership of the previous house into an LTC with the money borrowed by the company to buy it. This will free up the equity to reduce your non-deductible private debt.
Be fully aware of two things though. Firstly, from 1 April losses flowing from the LTC will be ring fenced. Secondly, the move of the old home to the LTC will re set the bright line test, meaning that if the house is sold by the company within five years any gain is taxable. These two issues need to be weighed against the benefits of the extra interest deductibility, especially when the previous house is not currently subject to the bright line.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.