SearchRestructuring arrangements
Tim asks:
(updated on Friday, April 17th 2020)
My wife and I jointly own the family home worth $510,000, mortgage of $200,000. We are wanting to move cities later this year and will purchase a new family home, while selling the existing home to a family trust and renting it out. (We have been advised trust is best approach for us given likelihood of returning within five years and living in our existing house again). The problem is that I will be taking a pay cut and my wife is currently on maternity leave, so now seems a better time to buy (initially as an investment).
We are wanting to know the best approach to maximise interest deductions? I assume initially it would be to have maximum mortgage on new property under our own names and a portion of the mortgage only at six months (say $300,000), after which time when we move, sell the existing house to trust at market value and transfer the six month portion to the existing house sold to the trust. We are wanting to know if this is tax avoidance, and if so, do we have to do the sale of existing house to trust at the time of purchasing the new house?
Our Experts Answer:
Well, the certainties are that the interest is only deductible when borrowed to fund an acquisition that is generating rental income. So, for now, if you buy a rental property with borrowed money the interest is deductible but losses are ring fenced. At the point you move into the rental you can sell the old home to the trust are restructure the debt.
This is not tax avoidance. You are free to structure your affairs and make estate planning decisions as you see fit.
Note that the sale of the old home to the trust restarts the bright-line. So remember if you move back in, you can only claim the main home exemption from bright line when you, as principal settlor, have lived in the home for the majority of the time the trust has owned it.
My rule of thumb is to plan for the factual reality of today, so if the new home is to be a rental, structure it accordingly and only alter that when your circumstances change. Remember also, that now that losses are ring fenced, you need to consider whether a restructure is justified when this restart the bright line count.
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