How have things changed under new LTC rules?

Question from Duncan updated on 30th June 2011:

I have a rental which is 80% paid off through my own contributions as well as the rent over the last few years. I have recently bought my first home with my wife and I wanted to release the equity & personal payments from the rental to contribute to the new home purchase. Under the old LAQC system, I could set up an LACQ to raise a mortgage, buy the property off myself and use the cash to buy my home. This would also have the advantage of having the LAQC mortgage tax deductable. Are you able to advise if under the new rules, I can still do something like this with an LTC or partnership (or any other tax vehicle)?

Our expert Mark Withers responded:

Until very recently it was felt that the new LTC couldn't be used to effect the type of restructure you refer to in the same way an LAQC could because of its transparent nature for tax purposes where assets are deemed for tax purposes to be held by the shareholders.

However, IRD have recently issued statements confirming that their interpretation of the new LTC law is that interest deductions will remain valid in the LTC is circumstances such as yours. Just an additional note of caution, these restructures are most common when someone transitions their own home to become a rental, in your case where the existing rental property with the equity is being restructured you will need to be concious of the tax avoidance rules that can relate to any transaction entered into solely to defeat the incidence of tax.

To avoid this suggestion there should be other commercial reasons for the transaction, for exemple, perhaps a genuine transfer of ownership by including your wife as a shareholder in the purchasing entity may be appropriate or perhaps you can include this as part of a greater restructure of your overall affairs for estate planning purposes.

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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