Restructuring successfully
Question from Paul updated on 31st August 2020:
I currently have a rental property in an LTC with a mortgage maturing in eight years. I top this up out of my salary. I live in my own home freehold which is in a Trust under my name. I don’t plan on selling either of these houses within the foreseeable future (possibly retirement 20 years away).
I have a new partner and we are planning on purchasing a house together, 50/50 for our blended family to all move into. We would be borrowing 100% using the equity we have in both parties’ houses. I pay child support direct to IRD if this has any bearing on my question.
My question is in relation to tax structure in particular for me (Trust / LTC). I plan on raising the equity to afford my borrowing against both my properties. Are there any tax loopholes or traps that I could fall into? Is it better to keep my structure the same and borrow equal amounts from the LTC and Trust or should I collapse the Trust putting my once home into the LTC? Please help!
Our expert Matthew Gilligan responded:
The issue here is that by default, interest on money borrowed to buy a new home will not be deductible, even if it is secured against rental properties. That said, there are opportunities to effectively structure the borrowing. For example, you should consider selling the existing dwelling to your LTC.
Doing so would give you a reason for undertaking borrowing in the LTC (ie: to buy the existing house) and then having that money flow through to the Trust to purchase the new home. As the LTC would be borrowing money to buy a rental, the interest would be deductible. However, you need to be cautious because there can be tax consequences of moving property between related entities, including the restart of the five-year bright-line clock.
Further, you need to check that there won’t be any tax consequences for the Trust as vendor. Another bonus in moving the property into the LTC is that it would be easier from an accounting perspective. It would also ensure that the profits and losses of the two residential rental properties are automatically grouped, which can be useful where rental losses are ring-fenced.
You note that child support is a potential consideration, but one that is beyond the scope of this brief answer. In the end I would encourage you to keep the Trust to own your half share of the new home and to get advice around the potential transfer of your existing home into the LTC.
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.
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