Can I make my mortgage interest tax-deductible?

Have you been told by your accountant and friends that your mortgage interest is not tax deductible?

I thought so.

That’s traditionally the case, but in most circumstances, your mortgage can be restructured so that some of the loan is lent to your company (sole-traders keep reading!), and therefore the interest becomes deductible.

Let me explain how this can be achieved.

First and foremost, the ability to achieve tax deductibility on your mortgage interest is a secondary consequence of needing to access your company’s profits.

It can not be achieved in and of itself.

Fortunately, it’s quite likely that you will be in this position, and most people won’t understand how.

Ryan, just fricken explain it already, you’re speaking gibberish!

Let’s start with the mechanics of the whole thing.

When your company makes a profit, the company has options as to how this is paid out to it’s owners.

Normally in NZ the working shareholders will take what’s known as drawings. This is simply withdrawing the profit that the company has made which is sitting in the company bank account.

As in, “Oh yeah, there is money in the account from the payment from that invoice and I need to pay myself so let’s transfer that to my personal bank account so I can spend it..” or something along those lines.

Your accountant then credits a salary against these drawings at year end, which you then pay tax on.

The drawings and salary are entered into a financial statement account called the current account.

What’s important to note here is that overtime, you can be awarded a salary in excess of the drawings you take over the year and this can lead to a scenario where the company owes you money, but the company does not have the funds to repay you.

Another way working shareholders can be paid is through a normal PAYE salary.

In this case, often times, some of the company’s profit is left in the company and a retained earnings reserve is built.

This retained earnings reserve, just like the current account mentioned previously, is owed by the company to it’s shareholders, legally.

Now, if you aren’t sure if your company owes you money, take a look at your latest balance sheet that your accountant prepared you. If you have a shareholders current account with a positive balance, or retained earnings with a positive balance then your company owes you money…

Ok, you’ve got it, your company owes you money…now what?

Now you need a means of accessing those historic earnings.

As I mentioned earlier, you probably don’t have the cash in the company bank account to repay yourself what you’re owed.

This is because you have spent those earnings on plant and equipment, a vehicle, or you may not have even received payment for the work.

This allows the company to borrow from the bank to repay you.

It’s important to note that you don’t need to INCREASE your mortgage. This can be achieved simply by restructuring your current mortgage balance.

“So……….if I don’t increase my mortgage then how can I repay myself?”

Good question.

The whole transaction, mortgage restructure will be a paper transaction. That is, no cash will actually flow.

However, given that your property is owned by yourself, rather than the company, it can be seen as a repayment. That is; the company has taken out a mortgage, which is on leant to you, effectively repaying yourself for those earnings you weren’t able to access…

This is quite techo speak, so don’t be alarmed if it’s hard to grasp. The fact of the matter is that this is a common transaction and easy for an accountant and bank to carry out.

Here are some diagrams I have prepared which should help explain the concept.

The situation pre restructure…

And then, post mortgage restructure…..

Post mortgage restructure your loan will look like the above…

So, what is the benefit of all of this?

Alongside getting to access your company’s earnings, you will now get interest deductibility on your mortgage……..so you pay less tax.

Mortgage interest is normally not deducible because under NZ tax law, the mortgage must be related to a business (nexus), which a mortgage on your private home obviously is not…

However, for company’s the rule is different. All loan interest is deductible, regardless of the purpose of the loan. See the below snippet from the NZ Income Tax Act.

And how exactly does the tax deductibility benefit you?

Consider a $1,000,000 mortgage on a 30-year term at ANZ banks special 3-year fixed rate of 6.65%...

Over the 30 year period, total mortgage interest will amount to a whopping $1,311,074. That’s more than the original cost of the house!

 At a marginal tax rate of 39%, restructuring this loan into your company will allow for $511,319 of tax deductions (actual cash savings) over the 30 years. You could buy a small apartment in Auckland with that.

I’m a sole trader, can this work for me?

Short answer, yes. However, the process is a little bit different (not harder, just different). Please send me an email and I can explain how it may work for you.

(P.S. the cover photo is me in Vienna in early June, and yes it was a great time 😄)