Turn Your Home Into a Rental the Right Way

Our clients bought a 2 Bed KiwiBuild property in Papakura, Auckland for $575,000 3 Years ago. But now they have two kids and it’s too small!

Now it’s worth approximately $700,000, and still has a home loan of about $380,000. They had a property manager suggest they could get $700 per week in rent.

They have the option to purchase mum and dad’s $800,000 much larger property for just $400,000 on the basis they look after them in their retirement. A win-win.

Therefore, they need to borrow an additional $400,000, which means in total, they will now need to borrow $780,000.

Here is how this looks without investment advice:

In the table and scenario above, there was no restructure or professional advice sought.

In essence only $380,000 lending could be claimed back when filing end of year reports to the IRD. This results in a taxable profit of around $7,130 every year.

At a 33% tax rate this is about a $2,352.90 tax bill every year.

To maximise the tax benefits available, the existing home needs to be sold and purchased by a new entity. In this case, it was suggested (confirmed through a Chartered Accountant) that they use a company known as a LTC (Look Through Company), which allows any tax losses (or profits) to be allocated to the company shareholders.

Here’s how the figures look when structured this way: 

Ahhh, here we go much better. Tax efficiency achieved! 

Please note that in both situations they are borrowing exactly the same $780,000. It’s just where that debt is sitting and the tax rules associated that has changed.

In essence, we have $700,000 of investment debt that is now a legitimate claimable expense, meaning a ‘paper’ loss of roughly $14,150.00 per year. These losses can be carried over to subsequent years to offset any profits made. 

Notes and Disclosure:

• We expect the house is worth $700,000, but it is always recommended to have a registered valuation to ensure that the value is not understated or overstated. If understated, the tax advantages are not maximised, and if overstated, then the IRD could question things and potentially cause all sorts of problems, including penalties.
• This article is not tax or accounting advice, just merely a guide of general principals. Talk to our property investment brokers for a recommendation for a top property accountant in your area.

• The initial upfront costs to seek professional advice may be higher (i.e. great accountants charge accordingly). The benefits far outweigh the costs after a year or two (as you can see in the tables above).

• The above can only be achieved when ALL of the lending is with the same bank due to LVR constraints. There are pros and cons to this.
• Brightline may be reset due to a restructure such as this scenario unless the rollover rule is applied. Check with your accountant on this.