SearchTransferring loans
Sunny asks:
(updated on Monday, April 01st 2019)
Is it possible to transfer my personal loan to my rental property when re-financing? We currently have two houses. One is a rental property under an LTC of which I am the only shareholder. The other one is our family home which my husband and I own jointly. The rental property has a $500,000 loan and the most recent CV on it was $930,000. Our family home has a $700,000 loan and the most recent CV on it was $1 million. In total, the loans come to $1.2 million.
My question is: could we make a deed of loan to transfer $200,000 from the LTC to the family home? Does it have a tax avoidance implication? Does a maximum 60% loan on investment property apply here? The bank has agreed to have the LTC loan at $700,000 leaving the family home loan at $500,000 with no changes to the total loan. But I am worried about any IRD and tax implications.
Our Experts Answer:
A restructure of debt like this can have tax avoidance and genuine deductibility problems as there is no automatic deduction for interest on a debt owed by a LTC. The IRD's position is that interest is only deductible to the extent that the loan refinances genuine "contributed capital" lent by the shareholder. For example, if the shareholders loan has been bolstered by distributing a tax free dividend from an unrealised revaluation reserve, the refinance of this portion of shareholder loan will give rise to non-deductible interest.
It may be legal to have the company hold the debt and the bank may agree given they will have cross collateral security arrangements over both. But if you are motivated by trying to gain a legitimate interested deduction, the limit will be the extent to which you can refinance the shareholder loan account that represents money actually lent to the company without tipping the shareholder loan into a debit balance.
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