Then buy a rental property for say $500,000, with a $500,000 loan. Secured $300,000 over rental, $200,000 over personal house.
Common Mistake 1 - The tax deductibility of the loan depends on what it was used for, and security doesn't matter. So, as the $500,000 loan is used to buy the rental, all the interest on the $500,000 is deductible!
A couple of years later, the loans are restructured so that they can get a pool for their personal home.
Mortgage broker organises a new loan with new bank for $900,000.
$500,000 to take over the rental loan, $300,000 to take over personal house loan, plus $100,000 for new pool.
What loan amount will now be interest deductible?
Common Mistake 1 again - What is the loan used for? $500,000 is used to refinance or take over the rental loan. So interest will still be deductible on this $500,000 or 55.6% of the total loan. The fact the security is only $200,000 over the rental does not matter!
10 Years Later - The rental has jumped in value and is now worth $1,500,000. The mortgage broker or lawyer (I just heard of an example of this very thing!) suggest that the $900,000 loan is transferred to the rental, so that it is more tax effective.
So, $900,000 is borrowed for the rental, secured solely against the rental (great for asset protection, as personal house is now unencumbered).
Common Mistake 2 - What is the loan used for? $500,000 to take over the rental loan, but also $400,000 for private house and pool. So, the interest is only deductible on the $500,000 part or 55.6% of the total loan, and the interest on the $400,000 is still not deductible.
Could this be done smarter? Possibly, and see my Restructure Blog (https://www.cswaikato.co.nz/index.php/latest-news-accounting-hamilton/accountants-hamilton-auckland/183). BUT there would need to be a commercial reason for the restructure!
Try to keep your loans separate and the rental debt clear, i.e. in the above example, I would have kept two separate loans, one for the rental and one for the personal house/pool. This makes claiming interest a lot easier, plus then you can concentrate on paying off the personal/non-deductible loan quicker!
A short video looking at an example of a rental property, the numbers now and over the next 10 years, plus whether I would buy it.
This short video looks at an example of a cheap do-up property: Is it worth trading, what are the GST and tax implications, and things to watch out for.