Share Investing with Property Mortgages

[Buffett Jr]

My wife and I own one rental property in Auckland with a 400k odd mortgage on it. We live in rented accomodation also in Auckland.

We have paid back around 40k of the revolving credit mortgage since buying around 2 years ago. One of our two fixed loans is coming off maturity (we fixed for two years) in around a months time.

So the option is...

Use that 40k available in the revolving credit and transfer it across to the table mortgage once it comes off the fixed term.

Or

Keep that 40k in the account and have there to buy shares (NZX or ASX) when the time arrises when we think they are a good option to buy.

We spoke to our accountant regarding this also and she mentioned that even though we would be withdrawing the 40k to buy an investment, we cannot offset the additional interest of that 40k if we use it to buy shares.

So overall, it seems to make sense to pay back the table mortgage for tax purposes?

What would you do in this situation?

[fungus pudding]

My wife and I own one rental property in Auckland with a 400k odd mortgage on it. We live in rented accomodation also in Auckland.

We have paid back around 40k of the revolving credit mortgage since buying around 2 years ago. One of our two fixed loans is coming off maturity (we fixed for two years) in around a months time.

So the option is...

Use that 40k available in the revolving credit and transfer it across to the table mortgage once it comes off the fixed term.

Or

Keep that 40k in the account and have there to buy shares (NZX or ASX) when the time arrises when we think they are a good option to buy.

We spoke to our accountant regarding this also and she mentioned that even though we would be withdrawing the 40k to buy an investment, we cannot offset the additional interest of that 40k if we use it to buy shares.

So overall, it seems to make sense to pay back the table mortgage for tax purposes?

What would you do in this situation?

Look seriously at selling your rental property and getting out of renting your accommodation unless you are likely to be on the move in the foreseeable future; and get another opinion on reducing tax payable on your share profit by deducting the interest.

[Buffett Jr]

Look seriously at selling your rental property and getting out of renting your accommodation unless you are likely to be on the move in the foreseeable future; and get another opinion on reducing tax payable on your share profit by deducting the interest.

We chose to buy a rental property instead of our own home for the very reason that we are on the move with careers, etc and can therefore have flexibility to live very close to where we work whilst still being on the property ladder.

If we owned the shares in the company name as opposed to individual names would this allow a tax deduction for offsetting the 40k loan interest?

[fungus pudding]

We chose to buy a rental property instead of our own home for the very reason that we are on the move with careers, etc and can therefore have flexibility to live very close to where we work whilst still being on the property ladder.

If we owned the shares in the company name as opposed to individual names would this allow a tax deduction for offsetting the 40k loan interest?


Good reason for owning rental property first. I do not know why you have been told interest is not deductible. Generally it is the purpose for which money is borrowed that determines deductibility, and if you are borrowing to increase your taxable income through dividends there should be no problem. Or put another way - you will be taxed on your profit - not on your dividend income; just the same as it works with any investment. It doesn't matter two hoots where you borrow from or what you have put up as security.

[Harvey Specter]

Going by what you said, your accountant is wrong. I'd refuse to pay the fee for that meeting!

[Buffett Jr]

Going by what you said, your accountant is wrong. I'd refuse to pay the fee for that meeting!

What about if we withdrew from the investment property revolving credit for a personal car or overseas holiday? Can we use that withdraw to essentially get a tax deduction on the interest?

[Aaron]

What about if we withdrew from the investment property revolving credit for a personal car or overseas holiday? Can we use that withdraw to essentially get a tax deduction on the interest?
Withdrawing for a car or holiday would not make the interest deductible as the loan is for personal consumption but as FP & HS say above I think your accountant is
wrong. If you borrowed money to invest in shares the interest would be deductible. Although I don't agree that you should never borrow to buy shares what did your accountant say about borrowing to buy shares at a time when the share market is at a peak. Borrowing to invest works when you are making a loss on the income but tax free capital values are increasing. If the capital value goes down it is a bad way to invest. But I guess things don't go down these days.

[couta1]

Any interest on money borrowed that will produce some taxable income(Profit and or dividends) is tax deductible in NZ end of story, if your accountant says otherwise change accountants or study up and do it yourself.

[peat]

but on the downside if a company owns it then capital gains will be taxable as income.
whereas they may not be (necessarily) if owned by the individual.

[fungus pudding]

I think there is a Mr and Mrs Buffet Jnr entity as well a Buffet Jnr Family LIMITED entity

Maybe that confuses the issue .... who owns the property and who is going to buy the shares

Maybe the accountant is right

Irrelevant. You can raise money against anything (e.g. your sister's farm, your friends car, etc) The security, or who owns it does not matter. The interest you pay is what matters.

[Harvey Specter]

What about if we withdrew from the investment property revolving credit for a personal car or overseas holiday? Can we use that withdraw to essentially get a tax deduction on the interest?No as the borrowing isn't for income producing purposes.

You also have to be careful of intermingling which might be what your accountant is referring to. If you can say that all the interest relates to income producing assets, because you also bought a jetski, then you have issues.

[Snow Leopard]

but on the downside if a company owns it then capital gains will be taxable as income.
whereas they may not be (necessarily) if owned by the individual.

The rules for whether a capital gain is taxable for a company are precisely the same as for an individual, it all depends upon the intent at the time of purchase.

Best Wishes
Paper Tiger

[couta1]

The rules for whether a capital gain is taxable for a company are precisely the same as for an individual, it all depends upon the intent at the time of purchase.

Best Wishes
Paper Tiger Eh not quite right there PT there is currently no capital gains tax in NZ so having an intent to make a capital gain is quite fine however having an intent to make a profit is not and is taxable the rules are as clear as Wellington airport on a foggy day aye:cool:

[Snow Leopard]

Eh not quite right there PT there is currently no capital gains tax in NZ so having an intent to make a capital gain is quite fine however having an intent to make a profit is not and is taxable the rules are as clear as Wellington airport on a foggy day aye:cool:

Don't usually respond to this sort of thing but I can be as pedantic as the next poster if you wish.

I did not say capital gains tax!!
But if your intent is to make a profit through a capital gain (i.e. buy with the intent to sell to make a profit) then the profit/loss is part of the taxable revenue for the entity.
If you buy with the intent to generate income then any [incidental] profit/loss that you happen to make if you do sell is not part of the taxable revenue.

It is difficult for entities to mix and match and needs very clear separation of the two different activities.

The rules are perfectly clear, in theory, but....

Best Wishes
Paper Tiger

[peat]

The rules for whether a capital gain is taxable for a company are precisely the same as for an individual, it all depends upon the intent at the time of purchase.

Best Wishes
Paper Tiger
I do agree that the rules are the same. My thinking was a company is more likely to be 'in the business' of trading said asset, coz that's what companies do. And that makes it taxable.
but yeh maybe you're right, its not necessarily true.