IF I SELL THE FAMILY HOME TO AN LTC IS THE INTEREST TAX-DEDUCTIBLE?

Mar 31, 2013
roi

If I sell the family home to an LTC is the interest tax-deductible? That’s a good question. (See this article if you’re wondering what an LTC is)

IRD says yes, under certain circumstances. But what are they? (NB: this is not the only way to get into rental investment property.  Contact us for advice).  Anyway, IRD wrote in TIB (Tax Info. Bulletin) Vol. 24 No. 7:

QUESTION

  1. 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.

ANSWER

  1. 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.
  2. 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

Key points to note are:
1. The home must be 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 should be no “mate’s rates” here.  (If you are renting to a family member, contact us for advice on best practice)

3. Under present rules i.e. pre 1 July 2024, unless the house is rented to an approved community housing provider or is a “new build“, there is no interest deductibility

Questions?  Contact us at EpsomTax.com or on 0800 890 132.

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