Transferring debt

Question from Akane updated on 6th April 2015:

Hi, I would like to ask if it is possible to transfer my personal debt to my rental property. Currently I have a rental property that has a $300,000 mortgage, the market value right now would sit around $420,000. I also have a personal property that has a $490,000 mortgage with a market value around $600,000. Is it possible to sell my rental property to my newly formed look through company (LTC) at the market value of $420,000? Then use the "profits" made to pay my own property's mortgage? Basically shifting my personal mortgage to my LTC for tax reasons? Thanks.

Our expert Mark Withers responded:

There is nothing technically stopping you for transferring the rental property to the LTC. However, I note it is already a rental property rather than a private property being moved into a rental activity for the first time. I'm also guessing that you are the sole owner of the LTC. At this point I need to sound a warning. IRD have recently taken a number of tax avoidance cases successfully. The issue you raise has not been one of them but the test for tax avoidance is whether the transaction is purely designed to defeat the incidence of tax. Ask yourself whether there is any commercial reason to do this aside from increasing the interest deduction you seek? The situation is also made more challenging when the transaction does not alter the effective ownership of the asset. I.e. you own it now and if you are the sole owner of the company the effective interest is the same. You should also check what depreciation has already been claimed on the building as this may be subject to recovery when you transfer it. IRD has published commentary suggesting that it is not tax avoidance to transfer a previous home to an LTC if it is being structured into a rental activity for the first time. The transaction you are contemplating may stand tax avoidance scrutiny if the debt restructure was a by-product of a larger estate planning or relationship property restructure where tax saving is not the motivation behind the restructure.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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