50:50 Partnership versus LACQ

Question from Jennifer updated on 3rd November 2006:

Hi, we are looking into purchasing property for rental investment. What are the other options in structuring the ownership of rental property to utilise the foreseeable first 5 years' losses in rental, besides LAQC? Is Partnership (i.e 50/50) a good alternative? Is the Government/IRD looking into use of partnership for residential property, just as what they are doing to the LAQC structure? What are the proposed changes on Partnership and LAQC for tax benefit on residential property, and when will it take effect?

Our expert responded:

A partnership will give you the same tax benefits as an LAQC. The downside of using a partnership is twofold. Firstly, there is unlimited liability not just for what you do but also what your partner does even if you don’t know about it. This is called joint and several liability, and it means that if you own your own home in your own name, then your home could be put at risk should anything go wrong with the rental property. And secondly, generally the property is put into both your names as joint owners, so the only split you can have between the partners is 50/50. This is not the best in the case of life partners if one partner earns considerably more than the other. An LAQC gives the ability to stream the losses in any way you see fit. At this stage, there has been no talk of changes about partnerships. The talk to date has centred around LAQC’s because of the proposed introduction of limited liability partnerships (LLPs). An LLP structure potentially makes LAQCs redundant as it has the same passing through qualities as an LAQC and is more internationally recognised by overseas investors. Whether or not this is so depends on the final legislation when it is passed into law. The LLP regime is expected to come into effect some time next year. At this stage, it is still going through the process of submissions and we do not know what the final outcome will be. Watch this space!

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.


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