To LTC or not to LTC?
Question from Peter updated on 28th January 2019:
My wife and I have one house (purchasing price $550,000, GV $700,000, mortgage free). We would like to buy another house that will be financed by using the equity of our current house. We will live in the new house and our current house will become a rental property. So what would be the best structure for us if we want to maximize tax deductions for our rental property? Is it possible to claim 100% loan on $700,000 via a Look Through Company (LTC)?
Our expert Mark Withers responded:
The problem with this situation is that none of the interest on the loan taken out to buy your new home is deductible against the rental income from the old on - even if the old home is part of the security for the lending. This problem is usually solved by selling the old home at market value to a LTC that borrows the money to buy it. This then releases the equity in the old home so that it can be used to buy the new one. Because the company borrowed the money to buy the property it is renting it has a nexus between the interest cost and the rental income and can claim the interest deduction.
The LTC status allows a loss, should one exist, to then be claimed against the shareholders other incomes. Note that the Labour government seems set to ring fence tax losses from rental properties which will probably necessitate changes to the LTC regime. Despite this the restructure is still advisable as the alternative would be full income tax on the rent from the old home with no interest deductions at all to claim. But also note that the two year count for the bright line test begins again when the company buys the property. This is set to become five years under the Labour led government.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.