FIRSTMATE BLOG: CAPTAINS LOG

Interest deduction in an LTC5.03.2014

Question
Our client sold their family home into an LTC. The property is now tenanted by a third party.

Prior to the restructure, the mortgage on the family home was $200k. In order to purchase the property from the client, the LTC borrowed a further $250k from the bank.

Can the LTC get an interest deduction on the full mortgage of $450k or are the deductions limited to the original mortgage of $200k?

Answer
If the LTC has borrowed $450k to purchase the property from your client, an interest deduction would be allowed for the full amount of interest (i.e. on the $450k) provided the property continues to be used as an income-earning asset.

Note that the automatic interest deduction provision that applies to companies does not apply to LTCs, therefore the interest on the bank loan will only be deductible if the general deductibility criteria are satisfied. The IRD’s view is that where borrowed funds are used to acquire an income-earning asset (such as a rental property) and the property continues to be used as an income-earning asset, then that would establish a sufficient connection.

The IRD has specifically confirmed this position – Refer to QB 11/03: Income Tax – look through companies and interest deductibility:

http://www.ird.govt.nz/technical-tax/questions/questions-general/qwba-1103-it-ltc-interest-deductibility.html . In particular, refer to paragraph 23 and Example 2.
Provisional tax and use-of-money-interest

Posted: March 5, 2014
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