If I rent from my LAQC, what are the tax implications?

Question from Simon updated on 20th November 2008:

I am recently separated and want to get into a new property and start a new life as soon as possible. Unfortunately I am not in the best position to do that now. My mother is set on helping me out. We can afford a suitable property that I can share with my children. My mother will not be living with us but wants to put in and make sure we get a good place. I want her to benefit from helping me out. Can we set up an LAQC with the two of us shareholders and purchase the new property which I then rent? I would not take any tax breaks or benefits but could still use my income over and above rent for debt servicing to obtain the required finance. Meanwhile my mother will be able to offset her interest costs against her personal tax liability. Then when I am in a position to purchase the property outright (possibly 5 years)I can buy her out at market value and she will profit. Am I missing something?

Our expert responded:

A possible issue with your plan is that IRD could consider this tax avoidance simply because of the connection between you and your mother and the fact that you are getting a direct tax benefit.  To get around this issue, your mother could set up a trust to buy the property instead of the LAQC.  The tax benefits are the same, although they are deferred until such time that the property is in a profit making position.  In a situation such as this, it is important that you and your mother see an accountant to ensure you get advice specific to your situation and ensure you are both protected.

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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