Whilst the funds remain in Britain, and regardless of whether they were accumulated before the relationship, a good argument exists that they are separate property.
I know that this issue was not the focus of the question posed, and your response certainly seems the correct one in strictly fiscal terms. But this is an issue that, in my view, should be highlighted.
A. Is this what we've come to? Every time a person in a relationship makes a financial move, should they consider the implications if the relationship breaks up?
That's for each person to decide, so here's the information, in case they want to take it into account.
We'll assume the relationship is covered by the equal sharing provisions of the Property Relationships Act 1976.
If one person has money before the relationship starts, which seems the case here, that money "remains separate property, unless it is used or intermingled in a way which causes it to become relationship property", says Auckland barrister Margaret Lewis, who specialises in relationship property matters.
Using the money to reduce the mortgage on the family home will usually turn it into relationship property. But steps can be taken to prevent that, says Lewis.
A simple agreement could record that the funds are separate, but that the woman is lending them to reduce the mortgage, and the money is to be repaid by a specific date, when the house is sold or when the relationship ends, she says.
"A mortgage in favour of the woman, for the amount of the loan, could be used to support the agreement.
"The other spouse benefits from the immediate reduction of the debt, but does not acquire an interest in the funds themselves."
Even without such an agreement, if one partner makes significantly more financial and other contributions, the court can award that person more than half the relationship property, says Lewis.
Still, she notes, "the act requires a very high disparity of contribution before the family home is divided unequally".
So there we have it. Last week's correspondent might want to get an agreement written up before bringing her money home. Then again, she might not.
While many would argue that it's better to be safe than sorry about these things, safety comes at a price.
If we go through life constantly keeping in mind what bad stuff might happen to relationships, and taking steps to avoid it, don't we lose a little joy, a little faith in human nature?
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Q. I must admit that I haven't had a good sleep since I read your recent article.
You wrote: "Note, too, that your mortgage interest won't be tax deductible against your rental income. That's because, when you originally borrowed the money, it was to buy your home, not an investment property." What does that actually mean?
I nearly fell off my chair when I read it, and I am still tempted to pick up the phone and put my tenants on the street.
I bought the house with my (now former) spouse, and we lived in it for seven years.
When we separated I bought her out and put the new mortgage, which became close to 90 per cent of the valuation, in my name.
I lived in it for a few months, next rented it out and bought myself a house in Auckland City on a complete new mortgage with a different bank. I didn't refinance the old house for this new transaction.
The rental income covers about 90 per cent of the outgoings - mortgage, rates and maintenance - so I am not badly out of pocket.
However, if I interpret your article well, on my tax return I would be unable to deduct the interest on the mortgage of the rental house, as the house was a family home before I rented it out.
That being the case, I would have no option but to move the tenants out and sell the place to an investor who would be able to claim the interest on mortgage payments.
This would have ramifications for a lot of mum and dad investors wouldn't it?
Am I misinterpreting something here?
A. Time for sound sleep, and sweet dreams about tenants also snug in their beds.
I got it wrong. And many other people, including those who have informed me about this issue in the past, apparently also misunderstand the situation.
Let's start with the basics. If you borrow money to make an investment that will produce taxable income - whether the investment is in a rental property or shares or emus - the interest is tax deductible. But if you borrow to buy your own home, the interest is not deductible.
What if your home becomes a rental property, but with the same old mortgage?
"The Tax Act should allow a deduction for interest when the house is rented out," says PricewaterhouseCoopers tax partner Scott Kerse. "However, the IRD don't always agree. They will want to refer back to the purpose of the original borrowing, i.e. buying a family home."
His statement surprised me. I had always understood that was Inland Revenue's thinking, but I didn't know the Tax Act disagreed with it.
It was time to get it from the horse's mouth. And another surprise was in store.
"Based upon the reader's facts, their interest payments on 'mortgage A' (the loan on the house you are renting out) would be deductible", says Sian Routledge, of Inland Revenue Corporate Communications.
She goes on to point out that if you have a mortgage on a house that is used for "private or domestic use" for part of a year and is rented out for the rest, you can deduct interest only for the rental period.
In your case, that would apply to the year you moved from the house you are now renting out.
Interest is also apportioned if part of a loan is used for private use.
In a 1997 court case, some taxpayers took out a mortgage of $208,000. They used $185,000 to buy a new home, and the remaining $23,000 to roll over the mortgage on their old home, which they rented out.
They were allowed to deduct interest on the $23,000, but not the rest.
For those who want details, the IRD's policy on interest deductions is spelled out in Tax Information Bulletin Vol 3, No 9, June 1992, p14. And the court case is Case T16 (1997) 18 NZTC 8,095.
To you and others worried by what I wrote before, I apologise.
And I must say I'm glad to hear the IRD permits the deduction in situations like yours. It's only fair.
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Q. I have a question relating to investment security that could well be of interest to readers selling property.
We have sold our residential property and do not expect to be able to buy another for two or three months.
We cannot afford to put the sale proceeds at risk and have considered investing in 90-day bank term deposits or leaving the funds in our solicitor's trust account.
Your thoughts or recommendations would be appreciated.
A. The safety of the money is paramount. I've heard of people putting house proceeds into shares for a short while, and losing lots. That's crazy behaviour.
The shorter the investment period, the higher the likelihood you will lose money in shares.
Over three months, there's about a one in three chance. And that's before allowing for brokerage and taxes - which brings me to another important point: the shorter the period, the more effect any entry or exit costs will have on your total return.
With safety and costs in mind, the two options you mention are best. I would go for whichever pays you higher interest. You might not get any interest in the trust account, so that makes your choice pretty clear.
Don't look at just your own bank for term deposits. It's easy to make a deposit in another bank.
Check
Good Returns
or
interest.co.nz
for term deposit rates, keeping in mind that you are quite likely to get more for a large amount.
Don't get tempted by non-banks offering higher rates. If they are paying more interest, there's going to be some risk.
In any case, over a short period it's surprising how little difference a couple more percentage points makes. If you invest $100,000 at 4 per cent for two months, you'll get $446 in interest, after tax (assuming 33 per cent tax). At 5 per cent, you'll get $558, and at 6 per cent, you'll get $670.
Double those numbers for $200,000; multiply them by five for $500,000.
Is it worth taking a risk to get just a few hundred more dollars?
If you think you might need the money in two months rather than three, watch out for an early withdrawal penalty on a 90-day investment.
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* Mary Holm is a freelance journalist and author of Investing Made Simple.
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