How do I get the full tax benefits of a LAQC?

Question from Dick Muller updated on 20th November 2008:

I am currently the owner of two properties, my intentions are to convert my second property to a LAQC and rent it out. My understanding is that previously one could claim all losses (difference between rental income and loan repayments)back. I am now informed that I cannot sell this second property to a LAQC for more than my initial purchase price or my initial purchase balance at the bank! This will render the exercise totally futile as the tax breaks are particularly aimed at the value of the property. Is this true, and if so, what are my options as I would like the full tax benefits from a LAQC as this was my initial understanding, has this indeed changed? Thank you.

Our expert responded:

Unfortunately, you have had some poor tax advice and this only highlights (again) the need for people to get advice from professionals experienced in this area.  Believe it or not, it's true - you get what you pay for!  In order to sell the property from yourself to your LAQC, it must be at market value which is likely to be more than what you paid or the mortgage you currently have on the property.  The losses do not necessarily arise from the shortfall between your rental income and loan repayments - that could be a cash shortfall but not a tax shortfall because the repayment of principle on a mortgage is not tax deductible, only the interest is.  The other big contributor to the tax benefits is the amount of depreciation, so make sure you can a chattel valuation.

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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