Buy and sell with LTC

Question from Bryan updated on 16th April 2014:

I have a home in Auckland valued at approx $640,000 with a $40,000 mortgage. I am moving to Wellington and will rent my home in Auckland. I have been advised to sell my home to my rental company (a LTC of which my wife and I are the shareholders) and use the equity to finance the purchase of a house in Wellington. There would be an interest only loan on the Auckland property. In eight years time I will return to Auckland, sell the Wellington property and repurchase my home. Does the repurchase in eight years have to be at market rates? If so, is the difference between selling and buying from our own company written off and is the property gain subject to tax?

Our expert Mark Withers responded:

The purchase of a property from a shareholders company is a related party transaction that must be conducted at market value. The LTC forwards all income and expenditure to the shareholders and the capital gain in the company is treated for tax purposes as having been derived by the company. It will still be necessary from an accounting perspective though to distribute a dividend from the company’s capital reserve to extract the funds from the company. Note that related party capital gains generated by standard closed companies are far more problematic. Dividends from these reserves are taxable on distribution in the hands of the shareholders even if the dividends are distributed on windup of the company.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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