Home and Income Can you borrow against the rental only

Posted on Thursday, August 13 2015

Home and Income Can you borrow against the rental only?

If you borrow funds to purchase a rental property, the interest on those funds will be tax deductible as the funds have been used to purchase an income earning asset. If you borrow funds to purchase your own home, the interest on those funds will not be tax deductible as the funds have been used to purchase a private asset.

What about the situation where you purchase a property as a home and income. That is, a property where you live in part and rent out the other part. Funds borrowed to purchase a property on one title would be used to purchase both the home and income so what portion of the interest is tax deductible?

The standard approach in that situation is to measure the floor area of both the home and income to work out the percentage that relates to the income. You would then claim that portion of the interest as a tax deduction.

But is there a better way? Is there a way to show that the borrowed funds were used to purchase the income, not the home?

Let’s take the example of a home (100sqm) and income (100sqm) property purchased for $500,000 with a $250,000 deposit. Under the standard approach, you would be able to claim 50% of the interest on the $250,000 of borrowed funds required to purchase the home and income. However, it would be far better if you could structure the purchase so that the $250,000 deposit was used to purchase the home and the $250,000 of borrowed funds was used to purchase the income so that all of the interest on the borrowed funds was tax deductible.

Realistically, the only way to show that all of the borrowed funds have been used to purchase the income is by separating the ownership of the home and income. If the property is on one title, its just not practical to say that the borrowed funds relate to the income only.

So the only option is to subdivide, create a cross lease or a unit title, so that you can then borrow against the income only. Of course, the significant costs of the those options means that this step would only be taken if you had more in mind than just getting your interest tax deductible.

To summarise, the only way to claim 100% of the interest on funds borrowed for a home and income is if that property could be separated into more than one title. Otherwise, you’re stuck with the standard approach of claiming a portion of the interest based on floor area.

Tony Thorne
www.thorneaccounting.co.nz

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Expert's Bio

Tony Thorne

Thorne Accounting has been providing specialised accounting and tax services to residential and commercial property investors since 2004. Our mission is to provide the highest quality tax and accounting services to property investors. We are constantly fine tuning the way we work with property investors so we can provide this superior service at competitive prices.

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