YES! I want to learn more about property investments.

Common Restructure to Become More Tax Effective (Personal Home becoming a rental) Updated April 2020

Common Restructure to Become More Tax Effective (Personal Home becoming a Rental)

Updated April  2020


By Ross Barnett - Property Accountant


Are you trying to get ahead on the property ladder by converting your current personal home into a rental, and then buying a new personal house?

This is an example of poor advice that I have recently seen, followed by a common restructure that makes the overall situation more tax effective.

Poor advice and current situation
Jack and Jill own a personal house (House A), worth $500,000 with $50,000 of debt in their personal names. 
Jack and Jill have been advised to keep House A in their personal names.
They have purchased a new personal house (House B) for $600,000 with a $600,000 mortgage.
Outcome – Unfortunately with this structure, none of the interest on the $600,000 loan is deductible.  Only the interest on the $50,000 loan on House A will be deductible.   At say 3% interest, this would be a $1,500 deduction, reducing tax by $495 (if at 33% tax rate).

A common restructure is to sell House A to a Look Through Company (LTC) at fair market value.  The LTC would then borrow 100% (can do with one or two banks!) being $500,000.  The interest on the $500,000 is deductible as it is being used to buy a rental property.  At say 3% interest, this would be a $15,000 deduction, reducing tax by $4,950 (if at 33% tax rate).
Jack and Jill would then receive the $500,000, pay off the $50,000 current debt, and use the $450,000 cash towards House B purchase.  This way there would only be $150,000 personal debt left, where the interest is not deductible.
This creates a tax advantage of $4,455 per year! ($4,950 new tax saved less $495 old tax saved).
For any restructure, it is important to look at the cost versus the benefit.  There can be catches such as depreciation recovery, tainting and the Brightline test to consider.  Also, whether there is a commercial reason for the transaction.  So it is important to get expert advice.  QB 12/11 from the IRD gives some great information on this type of transaction as well, and confirms that this type of restructure is not tax avoidance, but it does depend on the exact circumstances!

 Ring Fencing

Ring Fencing came in from 1 April 2019.  This means that if a property runs at a loss, that loss cannot offset your personal income and cannot give a tax refund.  But the loss can offset other property profits and reduce tax that way.

So for a restructure, if the current personal house becomes a rental and runs at a loss, there is still likely to be some tax gains, but part of the tax gains might not be in cash savings, and part might be carried forward as tax losses towards future year property profits.

What else to consider when converting your current personal house to a rental?

When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental.  Unfortunately, this is often done for emotional reasons!

If you are thinking about doing this:

1)  Is your existing house a good rental?

Is there high tenant demand in the area?  Look at population figures for the area and talk to a local property manager.
Will you be able to attract a good tenant?
Is the property easy care and low maintenance?
Is there an opportunity to add value in the future?  For example, subdivide or add a minor dwelling.

2)  What is the cash flow?

As a starting point, I would work out the Gross Yield.  This is the expected rent divided by the property value *100.  For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield. The number of weeks of expected rent can vary widely depending on the type of property, condition of the property, and location, and try to be realistic.

The Gross Yield gives an indication of the cash flow:

4% or under is going to be quite negative cash flow based on 100% mortgage and a $550,000 property.

5% or better should break even or be positive cash flow for a $550,000 property.

Between 4% and 5%, it will depend on the property and it's likely costs. If buying cheaper properties, the expenses will be higher as a proportion of rent, so you will need a higher Gross Yield to break even.

Review the income less the full expenses.  The example below shows a $4,432 loss expected per year, based on current data.

























3)  What happens if interest rates go up?

In 10 years time, this loss could be $10,376 per year, based on 3% increase in rent and expenses each year, and being conservative with interest rates going up to 5%.

4)  Can you afford the cash flow losses?

5)  Do you want to gamble that the property will go up more than the cash loss?

6)  Or do you have a plan to change the cash flow?

  • Minor dwelling to increase rent
  • Subdivide long term and sell section, or build second rental on section
  • Inheritance coming that can reduce the rental debt.  NOTE:  you are likely to pay off any personal debt first.

Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

I hope you have found this topic of interest.

Kind regards



Property Accountant | New Zealand


Property Newsletter - please join -


Facebook Page - we do loads of great videos about property investing:


Contact Us

For further enquiries about your situation and what Coombe Smith One50 Group Property Accountants can do for you, please email, phone or fill out our contact form. 

We'd love to hear from you!