IRD says yes, under certain circumstances (NB: this is not necessarily the best way to get into rental investment property. See the bottom of the page for our thoughts). Anyway, IRD recently wrote in TIB Vol. 24 No. 7:
- We have been asked whether s BG 1 would apply to the following arrangement:
- a person sells their family home to a look-through company (LTC);
- the home is used by the LTC as a rental asset and is rented to a third party on an arm’s length basis;
- the person owns 100% of the shares in the LTC;
- the sale of the home is at market value;
- the LTC borrows from a bank to fund the purchase;
- the person then uses the funds raised from the sale to purchase a new family home;
- the person, in their capacity as holder of an effective look-through interest in the LTC, is able to deduct the interest incurred by the LTC on the loan.
- As the property has been rented to a third party on an arm’s length basis, the Commissioner’s view is that s BG 1 would not apply to the above arrangement.
- If an arrangement were to vary materially from the arrangement outlined in the question above, or if there were other relevant facts that might materially affect how the arrangement operates, then the Commissioner would need to consider the matter further and a different outcome might apply.”
Key points to note are
1. The home is rented “at arm’s length.” It means that each party to a transaction is independent and on an equal footing, despite any family relationship.
2. The sale is at market value. There are no “mate’s rates” here.
Questions? Contact us at EpsomTax.com or on 0800 890 132.
If you do the above, you go from having a medium to small mortgage which is not tax-deductible, to having a large mortgage which is still not tax-deductible. There’s a better way to do things! How? We recommend you talk to Goodlife Advice, who are Authorised Financial Advisors.