Looking to enter the rental property market in the New Year?
While it can be an exciting time, it can also prove costly if the right steps aren’t taken.
Importantly, an incorrect ownership structure can result in you paying unnecessary tax.
This can arise when you own a family home and wish to buy an investment property or, alternatively, buy a new home and rent out the existing home.
Any interest charge on lending taken out for the purposes of financing an income earning asset (i.e. an investment property) is a tax deductible expense. If the money is borrowed to buy a home for you to live in, the interest is not deductible.
Therefore, if you wish to buy an investment property, it makes sense to have as much lending against the investment property as possible rather than against the family home.
This needs to be achieved before settlement date.
It also pays to keep in mind the five-year bright line rule, where you’ll pay tax when you buy and sell a residential property within five years, unless an exception applies.
And be aware of the Inland Revenue Department’s (IRD) proposed ‘ring-fencing’ law change which the Government is currently considering. The IRD hopes to prevent investors from being able to offset losses from investment property against their personal incomes. If approved, the law change may take effect in the 2019/20 tax year.
Start 2019 on the right foot by seeking sound legal advice before you commit to an investment property with unforeseen consequences.
Featured in The Weekend Sun - 28 December 2018