Rollover relief allows you to change the legal ownership of property after 27 March 2021 while allowing you to deduct a portion of your interest expense during the interest phase-out period.
Rollover relief applies for interest limitation purposes when residential property is transferred as follows:
- under a settlement of relationship property
- as part of a company amalgamation that qualifies as a resident’s restricted amalgamation
- after the death of the owner of the property, to an executor or administrator of the estate or to a beneficiary of the estate.
- in some cases to or from look-through companies and partnerships
- in some cases to or from family trusts
Specific relief also applies for certain transfers of land subject to the Te Ture Whenua Māori Act 1993.
Look-through companies (LTCs) and partnerships
Rollover relief applies in certain circumstances to transfers to or from LTCs and partnerships.
It applies for a person who is a shareholder in the LTC or a partner in the partnership, to the extent they have the same ownership interest before and after the transfer.
Rollover relief applies for transfers of residential property to or from family trusts, provided the following apply:
- each transferor (in the case of transfers to a trust) or each transferee (in the case of transfers from a trust) of the residential property is also a beneficiary of the trust
- all principal settlors are beneficiaries of the trust
- each beneficiary is either a principal settlor, has a family connection with a principal settlor, or is a company controlled by a family member beneficiary or is a charity.
Also, when the trustees of a family trust transfer the property back to the settlors who first transferred the property to the trust, each recipient’s proportionate interest in the property must be the same as what was held before the property was transferred to the trust.
Rollover relief may apply to a transfer from the trustees of a qualifying family trust to the settlors, even if the settlors did not previously transfer the property to the trust, but the trustees instead acquired the property from a third party. In this case for rollover relief to apply all the settlors receiving the property from the trustees must have been principal settlors of the trust both at the time the trustees acquired the property and when the trustees transferred the property to them.
If certain criteria are met, rollover relief also applies when residential property held in a qualifying family trust is resettled onto another family trust.
Rollover relief does not apply when you transfer shares in an LTC to a trust.
Māori authority or Māori family trust
Rollover relief is available for a transfer of residential property to a Māori authority, or person eligible to be a Māori authority, as the trustee of a trust if the following apply:
- the residential property is subject to Te Ture Whenua Māori Act 1993
- each transferor is both a settlor and beneficiary of the trust
- the transferors of the residential property and the beneficiaries of the trust are all either members of the same iwi or hapū or the descendants of the same tipuna (living or dead).
Also, when the trustees of a trust transfer property that comes under Te Ture Whenua Māori Act 1993 back to the persons who first transferred the property to the trust, each recipient’s proportionate interest in the property must be the same as what was held before the property was transferred to the trust.
Mary and Bob, a married couple, are the shareholders in a look-through company, Company A. Mary and Bob jointly own an investment property in equal shares (50:50). They each hold 50 percent of the shares in Company A. Mary and Bob had drawn down a loan in 2018 to purchase the property. In September 2021, the loan has an outstanding balance of $100,000.
In September 2021, Mary and Bob sell the property to Company A. Company A borrows $150,000 from the bank for the purchase of the property and uses its equity to fund the remainder of the purchase price. Partial rollover relief applies to the transfer of the property, meaning that Company A can deduct the interest on a loan balance of $100,000 (being the amount of Mary and Bob's original loan balance on the date of the transfer) subject to phasing until 31 March 2025. Company A’s excess loan balance of $50,000 does not qualify for rollover relief.
Neo acquired a rental property and drew down a loan of $500,000 for the property on 3 March 2017. On 29 October 2022, Neo sells the property to his family trust. He and his son, Archie, are beneficiaries of the trust. The outstanding balance of Neo’s loan is $400,000. The trustee takes out a loan of $450,000 to purchase the property from Neo. Neo uses $400,000 of the sale proceeds to repay the outstanding balance of his loan.
The transfer of the property to the trust qualifies for partial rollover relief and therefore enables the trustee to deduct limited interest deductions until 31 March 2025. However, only interest on $400,000 of the trustee’s loan is deductible (being the amount of Neo's loan balance on the date of the transfer). Interest on the additional $50,000 borrowed does not qualify for rollover relief and is not deductible.
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