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PROBLEM
We have been in our house for 15 years and have about 80 per cent equity. We've just found a new house we would like to buy and want to hold on to our existing property as a rental. What do we need to know?
SOLUTION
Jeremy Tauri, of Plus Chartered Accountants, says this is a common question.
The first thing to do is consider a suitable way to structure the ownership of your properties.
This will depend on your equity and the amount of loss or profit you expect the rental property to generate.
"Because you have a large amount of equity in your existing property, it may be best to set up a company to buy the home that is to become a rental property.
"That property should be bought at market value with as little equity as possible - a 100 per cent loan if you can - and the sale funds transferred to the new property you are buying."
That leaves you with a smaller mortgage on your new home and a larger one on your rental property. The interest on the rental property's mortgage then becomes tax-deductible.
You can't claim depreciation any more but you can claim a lot of the expenses involved with running a rental property.
"Keep in mind any break fees on your existing mortgage, though, because you won't be able to claim them."
If you want to be able to access the rental property's losses under a company scenario - the interest on the mortgage, property management fees, rates, maintenance and so on - you will need to set up a look-through company (LTC). A loss limitation rule applies.
"In effect the owners can claim a loss to the extent of their contributions to the company. These include loans to the LTC, shareholders credit current account and debt guarantees."
As long as you qualify for the losses, you can also apply for a special tax code with the IRD to get the tax refunds in your weekly pay packet.
If you decide to move back into the property in future, it will be deemed a sale and you will no longer be able to claim any losses.
Do you have a question for our experts? Email business@heraldonsunday.co.nz
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