Change in circumstances forces restructure

Question from Suzanne updated on 24th February 2011:

18 months or so ago, we formed a Trust and bought a new home in Palmerston North. We also formed an LAQC and decided to rent our old home at Foxton Beach via that company. We borrowed heavily against the rental property, and it makes a loss. Due to employment and financial reasons we have decided to sell the Palmerston North home and move back into our old Foxton Beach rental property. Can you advise the process and any tax implications? Do we (personally or through our Family Trust?) buy back the beach property from the LAQC, then close the LAQC? Will we have to pay back depreciation claimed? Is it better for the Family Trust to own the beach property or ourselves personally? Any advice greatly appreciated.

Our expert Mark Withers responded:

One thing for sure and that is that the Foxton property should not remain in the LAQC if you wish to make it your home again. IRD have been on the warpath for some time looking for these types of ownership arrangement. You will need to sell it out of the company at market value.

Given you already have a trust it probably makes sense to use the trust given it was established to protect your personal wealth. With gift duty set to be removed in october the trust may well be best. If you have depreciated the Foxton property a depreciation recovery will be triggered as a result of the sale from the company.

I suggest you try to complete the transfer so that the company can become dormant before all the tax changes affecting LAQC's come into effect from 1 April.

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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