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

Sell family home to an LTC; sell rental property to LTC. Should you do it? Why would you do it? This strategy fell out of favour when interest deductibility disappeared for most rentals in 2021. It’s quietly come back into play now the rules have changed again. IRD says yes, you can. It set out the circumstances over a decade ago and has never withdrawn them. This guide sets out those circumstances. It also covers why the same logic now extends to an existing rental. And it covers what’s changed with interest deductibility and the bright-line test.

30-Second Read

• IRD confirmed in QB 12/11(opens in new tab) that selling your family home to an LTC, at market value, to be rented out at arm’s length, doesn’t trigger the general tax avoidance rule.
• The same principle applies to selling an existing rental into an LTC. You need a genuine sale agreement, a market valuation, transfer of legal title, and a new bank loan drawn down in the LTC’s name.
• Interest deductibility on residential rental property reached 100% from 1 April 2025 — for every taxpayer, regardless of when they bought the property.
• The sale of a genuine family home into an LTC generally qualifies for the main home exemption, so it shouldn’t trigger the bright-line test.
• The point of the exercise: shift debt from a non-deductible personal mortgage onto a deductible rental mortgage. Done correctly, that’s a legitimate restructure, not avoidance.

We work through IRD’s ruling, what’s changed since, the non-negotiables for doing this properly, two worked examples, and a checklist.

What Does IRD’s QB 12/11 Actually Say?

IRD first addressed this question in Questions We’ve Been Asked 12/11(opens in new tab), published in 2012. IRD considered this arrangement:

• A person sells their family home to a look-through company (LTC)
• The LTC rents the home to a third party at arm’s length
• The person owns 100% of the shares in the LTC
• The sale happens at market value
• The LTC borrows from a bank to fund the purchase
• The person uses the sale proceeds to buy a new family home
• The person deducts the interest the LTC incurs on the loan

IRD’s answer: because the property is rented out at arm’s length, the general anti-avoidance rule doesn’t apply. In plain terms, this isn’t tax avoidance. It’s a legitimate ownership restructure that happens to carry a favourable tax outcome.

IRD added one caveat. If the actual arrangement varies materially from this description, the Commissioner might reach a different conclusion. That caveat is exactly why the details matter, which we cover below.

Does This Extend to an Existing Rental, Not Just the Family Home?

QB 12/11 is written around selling a family home into an LTC. The same underlying principle applies to selling an existing rental property into an LTC too. You have freedom of choice in how you hold a rental property — personally or through a company. Nothing in the ruling limits that choice to a property that was previously your home.

If it’s fine under QB 12/11 to transfer the family home into a rental company, transferring an existing rental works the same way. The core requirements stay the same either way: a genuine, arm’s-length transaction at market value. You need a real bank loan drawn down in the company’s name, against real debt on a real property. We’ve confirmed this position with our specialist tax advisers. It’s consistent with how IRD has approached these arrangements since 2012.

Getting It Right: The Non-Negotiables

The gap between a legitimate restructure and an artificially constructed arrangement comes down to doing this properly. Before considering this strategy, make sure the arrangement includes every one of these elements:

• A genuine sale and purchase agreement, drawn up and executed as you would for any arm’s-length property sale
• A proper market valuation, supporting the price the LTC pays — no “mate’s rates,” even between family members
• Formal transfer of legal title, from the individual to the LTC
• A new bank loan, drawn down in the LTC’s name, funding the purchase
• Arm’s-length rental to a third party once the LTC owns the property

Miss any of these, and the arrangement starts to look artificially constructed. That’s exactly the distinction the anti-avoidance rule exists to police. Done correctly, the company incurs real interest on real debt against a real rental property. That’s a straightforward, defensible position.

Interest Deductibility: Where Things Stand Now

Interest deductibility on residential rental property has moved through several stages over the past few years. Deductions were phased out from 2021. They then phased back in: 80% from 1 April 2024 to 31 March 2025, and 100% from 1 April 2025 onward(opens in new tab).

That phase-back applies to all taxpayers. It doesn’t matter when you originally acquired the property, or when you drew down your lending. Even properties bought, or debt drawn down, before 27 March 2021 qualify. That matters directly here. A new loan drawn down today gets the same full deductibility as any other rental loan. That applies even to an LTC buying an existing family home or rental.

For an LTC set up under this strategy, interest was 80% deductible in the 2025 income year. It’s now fully deductible from the 2026 income year onward. That’s a materially better outcome than the position through most of 2021 to 2024.

Bright-Line Considerations

Selling a property into an LTC is still a change of ownership, so the bright-line test needs consideration. Two points make this more manageable than it first appears.

The main home exemption generally applies to a genuine family home. If the property is your main home, the sale should be exempt from bright-line, even within the bright-line period.

The LTC then carries its own two-year bright-line clock. Because the LTC buys the property fresh, the current two-year bright-line period starts from that purchase date. These restructures are usually done for long-term investment. The LTC holding the property well beyond two years usually makes the bright-line rollover rules a non-issue in practice.

One more wrinkle worth knowing: owned your home more than five years? You can sometimes sell it to the LTC at an uplifted market value. This falls under the partial rollover rules. This mainly affects how the new bright-line clock gets calculated, rather than changing the fundamental strategy. Discuss it with your accountant if it might apply to you.

Why Investors Do This: The Debt-Shuffling Logic

The appeal of this strategy is straightforward once you see the mechanics. Most homeowners carry a mix of deductible rental debt and non-deductible debt on their own home. If your rental is mortgage-free, or lightly geared, while your home carries a large mortgage, you’re missing deductions you could otherwise claim.

Selling the rental — or the family home — into an LTC restructures that balance. A new bank loan in the LTC’s name funds the purchase. The sale proceeds can reduce the mortgage on your own home, which is non-deductible debt. Meanwhile the LTC takes on new, fully deductible debt against the rental. Your total borrowing doesn’t need to change. What changes is which debt is deductible and which isn’t.

What Happens If the LTC Runs at a Loss?

Taking on new interest expense can push the LTC’s rental result into a loss, particularly in the early years. If that happens, and the LTC doesn’t hold other rentals to offset the loss against, the residential property deduction (ring-fencing) rules apply. They carry that loss forward against future rental income. It can’t offset your other income right away.

That’s still a better outcome than not restructuring at all. Without the restructure, you’d have no interest to claim and a larger rental profit to pay tax on today. With it, you build a pool of interest deductions that reduces your tax over time, even if the immediate cash benefit is deferred.

Worked Examples

Priya and Anish restructure their family home. Priya and Anish’s rental property carries a small mortgage. Their family home carries a much larger one. They sell their family home to a newly formed LTC at market value, supported by a registered valuation. The sale runs through a genuine sale and purchase agreement, with a new bank loan drawn down in the LTC’s name. They use the sale proceeds to buy a new family home, largely paying off their old home mortgage. Their old home qualifies for the main home exemption, so the sale itself doesn’t trigger bright-line tax. Going forward, their LTC claims 100% of the interest on its new loan. Their new family home carries little to no mortgage at all.

Daniel sells an existing rental into an LTC. Daniel owns a mortgage-free rental in his personal name and carries a substantial mortgage on his own home. Following the same principle confirmed under QB 12/11, Daniel sells the rental to a newly formed LTC at arm’s length, at market value. A new $550,000 bank loan gets drawn down in the LTC’s name to fund the purchase. He uses the funds to pay down his own home mortgage by the same amount. The LTC now carries fully tax-deductible debt against the rental. Daniel’s non-deductible home mortgage shrinks by the same amount, with no increase to his overall borrowing.

Checklist Before You Restructure

• ✅ Get a proper market valuation for the property before agreeing a sale price
• ✅ Draw up a genuine sale and purchase agreement between you and the LTC
• ✅ Arrange a new bank loan, drawn down in the LTC’s name, to fund the purchase
• ✅ Formally transfer legal title to the LTC
• ✅ Confirm the property will be rented out at arm’s length once the LTC owns it
• ✅ Check whether the main home exemption applies to your specific sale
• ✅ Talk to your accountant about the partial rollover rules if you’ve owned the property for more than five years

Common Questions

Does this only work for the family home, or can I do it with an existing rental too? The same principle extends to an existing rental. The arrangement needs to meet the same requirements: arm’s-length sale, market value, genuine loan, transfer of title.

Will I pay bright-line tax when I sell my home to the LTC? If the property genuinely qualifies as your main home, the sale should be exempt, even within the bright-line period.

Is the interest fully deductible straight away? Yes, as of the 2026 income year, from 1 April 2025 onward. Only 80% was deductible for the 2025 income year.

What if the LTC’s rental runs at a loss because of the new interest expense? If the LTC doesn’t hold other rentals to offset the loss against, ring-fencing carries the loss forward against future rental income. It can’t offset your other income immediately.

Do I need to be careful about how this is structured? Yes. Getting the mechanics right separates a legitimate restructure from an arrangement IRD could view as artificially constructed. That means a genuine sale, market valuation, transfer of title, and a real loan in the LTC’s name.

Further Reading

If you’re new to LTCs, or weighing up whether one suits your situation, these related articles cover the fundamentals:

• What Is a Look-Through Company (LTC)?
• How Do You Set Up an LTC?
• Should You Form an LTC to Own Your Rental Investment Property?
• Investment Property and LTCs: A Good Match?
• Offset LTC Profits or Losses Against Other Rentals — Can You?

Summary

Selling your family home, or an existing rental, to an LTC is a legitimate restructure. IRD confirmed this in QB 12/11, and the position hasn’t changed since. Get the mechanics right: a genuine arm’s-length sale at market value, a real loan in the LTC’s name, and formal transfer of title. Rent the property at arm’s length once the LTC owns it. Do that, and the interest deduction stands on solid ground. Full interest deductibility is back from 1 April 2025, and the main home exemption generally covers the sale itself. This strategy delivers a meaningfully better result today than it did through most of 2021–2024. The details still matter. Getting professional advice before you restructure is the difference between a defensible position and one that invites scrutiny.

Talk to EpsomTax.com Before You Restructure

This strategy can meaningfully improve your tax position, but the details determine whether it holds up. Get it wrong and you risk both a bright-line exposure and a challenge under the avoidance rules.

Contact EpsomTax.com before you sell a property into an LTC. We’ll work through whether this restructure suits your situation and make sure every element is structured correctly. That includes getting the timing right against the current interest deductibility and bright-line rules.