Loans for Rental Properties

1 August 2014

According to International Property Investor Dolf de Roos – New Zealand is a haven for property investors.  We have no Capital Gains tax on properties and have tax advantages on the expenses associated with rental properties.

While the tax advantages may not be the primary reason for investing in property it would be prudent for potential property investors to set up their loan to ensure they receive maximum advantage.

If the purpose of a loan is for the purchase of a property that will generate an income (ie a rental property) then the interest on the loan is considered a taxable expense.  So if you own a property that you currently live in and then decide to buy another property with the intention of renting it out  the interest on the new loan would be claimable as a legitimate expense.  Even if the new loan was secured by the home you are living in the interest would be considered a taxable expense as it is not the property that secures the loan that determines the tax liability but it is “purpose” that the loan was intended for.  So if you own a property that you currently live in and then wish to purchase a new property to live in with the intention of renting out your existing property then the new loan will attract little or no tax advantage because the “purpose” of the loan was to purchase an owner occupied home.

The next consideration is the entity that the loan and the ownership of the property should be under.  If you are investing in standard rental properties there are generally three common entities that are recommended.  Your own personal names, Family Trusts and look through companies.  We cannot emphasise enough the importance of obtaining advice from a qualified accountant before you purchase an investment property.  Getting this wrong could ultimately cost thousands and having to clean it up if you got it wrong would be messy and time consuming.

Finally the last consideration is the structure of the loan.  Generally if you are borrowing to purchase an investment property and have existing debt (mortgage) on your home loan the recommendation would be to put the new loan on interest only terms (as opposed to principle and interest).  Any surplus cashflow should be used to clear the existing personal debt (mortgage).  This allows the investment debt to remain the same – maximum tax advantage, and the personal debt (which has little or no taxable advantage) to reduce.  However if you have no personal debt then it would be worth considering clearing that debt even though it does have tax advantage.  

Our recommendation if you are considering purchasing investment property is as follows:

  • Do as much research as you can.  Read the books, talk with other Property Investors, familiarise yourself with the current rental property market 
  • Get pre-approved finance before you go looking for a property 
  • Collect a good team that will guide you and be able to give you the best advice.  These include Real estate agents, mortgage finance brokers, accountants, Solicitors and experienced property investors 

While you can read books and receive well intentioned advice from friends and families – only your Advisers will be familiar with the most recent rules and regulations and how they can impact on you.  Everyone’s financial situation is different and having qualified and experienced professionals is the best way to ensure you get the best return from your investment.  


Published In Whakatane Beacon

This post was written by

Trish Marsden - who has written 96 posts

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