Question from Alex updated on 28th May 2014:
Hi, my wife and I are going to buy our second house and we are considering renting out the first house. I understand to maximize our interest deduction, the first property (which is under our names) should be transferred to a new entity, say a company. I am the only income earner so if we transfer the house to a company solely owned by myself, will this be considered tax avoidance? Thanks.
Our expert Mark Withers responded:
The issue faced is that interest incurred by you to fund your personal acquisition will be non deductible. Interest borrowed by an entity to buy an income earning asset though will be deductible. Tax avoidance is loosely defined to include any transaction entered into to reduce the incidence of tax. Taxpayers though, are entitled to arrange their affairs to minimise tax. The type of restructure you are contemplating is relatively commonplace and to date, I have not seen evidence that would suggest this type of restructure is considered by Inland Revenue Department to be tax avoidance. With all related party land transactions though care should be taken to ensure assets are transferred at fair market value. It is also helpful if commercial reasons exist to undertake the restructure aside from just tax reasons. This may include estate planning and protection issues that should be contemplated as part of any overall restructure plan.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.