Restructuring for taxes

Our Experts Answer:

If things are left as they are the rental profit or loss will be returned by you on the basis that the property is in your name. Since you evidently have enough equity in your current home to allow you to consider retaining it when you buy a new home, I presume the rental activity would produce a profit, which means tax to pay in your tax return. I also presume you will borrow a large amount to purchase the new home if you retain your existing home. Therefore it is likely you will be best off selling your current home into a “rental” company.

Although there are pros and cons and you should seek specific advice, the sale of your current home into a company should allow you to structure your borrowing most effectively from a tax perspective. If you do not restructure, any interest that you pay on money you borrow to buy the new home would be non-deductible for tax purposes.

However, if you transfer your existing home into a rental company, you will likely have an opportunity for interest on your current borrowing, and some interest on the new money that you are borrowing to settle the home, to be tax deductible.

There are potential tax implications that can arise on transferring property between related entities like this. At the very least, be aware that transferring the current home into a rental company will trigger a restart of the five-year bright-line clock. Please get tax advice from an appropriate adviser.