Turn Your Home Into a Rental the Right Way

One of the most common ways to get involved in property investment is when you want to buy a new home and keep your existing house as a rental property.

As mortgage advisers, we are often asked to arrange finance for people, but we can also offer some basic general advice on how to structure things—always with the proviso that they speak to an accountant to ensure that everything is done properly.

Here is how we helped a couple turn their Auckland home into a rental, buy a larger home, and minimise tax in the process.

how to turn your house into a rental

Per Week Rent



Our clients outgrew their 2 bedroom KiwiBuild property and wanted to buy a larger home. This is a common scenario in New Zealand, but all too often loans are not structured correctly, and everyday Kiwis miss out on the advantages available to them.

In this case study, we look at how a simple restructuring will save our clients thousands of dollars each year, and also comply with the brightline property rule.


Professional Structure Setup


Same amount borrowed


Huge Tax Savings

Renting Out The Home Avoids the Bright-Line Property Rule

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:

Papakura House New Purchase Owner Occupied
Mortgage 6.65% $380,000 Mortgage 6.65% $400,000
Value $700,000 Value $800,000
Income Income
Rent (annual) $36,400 Rent (annual) N/A
Interest Cost (annual) $25,270
Rates $2,200
Insurance $1,800
Total $29,270
Profit $7,130
Tax Payable (33%) $2,352.90

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.

Structuring the Debt Against the Rental Property Benefited Our Clients

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: 

Papakura House New Purchase Owner Occupied
Mortgage 6.65% $700,000 Mortgage 6.65% $80,000
Value $700,000 Value $800,000
Income Income
Rent (annual) $36,400 Rent (annual) N/A
Interest Cost (annual) $46,550
Rates $2,200
Insurance $1,800
Total $50,550
Profit (loss) -$14,150
Tax Payable (33%) -$4669.50

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.

Ready to Turn Your Home Into a Rental?

With the right setup, our clients maximised tax benefits and minimised their tax bill. Ready to optimise your property investments and unlock financial freedom? Talk to an investment mortgage broker today and make your money work smarter for you!