Restructuring for taxes
Question from Katie updated on 3rd May 2019:
We have just bought another house which we plan to live in. We are looking at whether to sell our current home or rent it out. But we are not sure of the tax requirements if we rent it out.
Our current house is in my name only as I bought it before I met my husband. Our new home will be in both our names. I am a stay at home mum, so my income is 0 and my husband earns around $120,000 gross per year.
Are we able to offset any rental income off his tax or can it only be on my income? Would we need to put the house in both our names? What's the best way to structure this for tax?
Our expert Matthew Gilligan responded:
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.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.