Loans for Rental Properties

24 August 2016
When borrowing to invest in rental properties it is prudent for Property Investors to structure their loan to maximise any tax benefits.
PURPOSE OF LOAN:  It is the purpose of what your loan is for that decides if you are eligible for the tax advantages. If the purpose of the loan is to purchase a rental property then the interest on the loan is considered a taxable expense.  If you own a property that you live in and have a loan left over from when you purchased that property, and then decide to borrow to buy an property to rent out  the new loan would be claimable as an expense but the existing loan would offer little to no tax advantage.  However if you own a property that you live in and there are little or no borrowings left over from when you purchased the home 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.   
ENTITIES –Whether it is a Company, a Family Trust, a partnership or individual names each entity will off it’s own benefits but not all benefits suit all clients so it is imperative that if you are looking to purchase a rental property that you consult a good Accountant. 
STRUCTURE -  If you are borrowing to purchase an investment property and have existing debt on your home loan you could consider structuring the new loan on interest only terms (as opposed to principle and interest).  Any surplus cashflow this generates should be used to clear the existing personal debt.  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.  
Our recommendation if you are considering purchasing investment property is as follows:
1) Do as much research as you can.  Read books on the topic, meet with other Property Investors, familiarise yourself with the current rental property market.
2) Seek advice from a good accountant before you go shopping for a property to ascertain how best to maximise the tax benefits for your particular situation.
3) Get pre-approved finance before you go looking for a property – even if you don’t know the entity that the loan will be under you can always let your broker or lender know that which entity will be used at a later stage.
4) When you find a property you want to make an offer on even if you don’t know what your entity will be called – just put your personal names down as the “purchaser” but also include “And/Or Nominee” which allows you to transfer the contract to any entity of your choosing without having to go back to the vendor.  Be guided by your real estate agent here as they draw up these contracts all the time and know how best to do this that best suits your needs

Published In Whakatane Beacon

This post was written by

Trish Marsden - who has written 96 posts

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