Optimum ownership for partnership structures

Question from Margaret updated on 21st March 2011:

I have read your interesting and informative answers to the different questions posed. From what I hear the LAQC vehicle is no longer the best vehicle for buying a rental investment property and that perhaps personal ownership or a husband and wife 50/50 partnership. My tax rate is 33% and my husband's is 19.5%. We are purchasing a rental property with settlement within the next 6 weeks. The borrowing against the property will be around 80% to 90% and will run at a loss. I believe we can claim the losses (on the interest portion of the borrowing only) against our personal tax. As my tax rate is higher, would it be preferable to purchase the property and take the borrowing in my own name, or is there little advantage in that, making a joint partnership (husband and wife) preferable?

Our expert Mark Withers responded:

If the property is deriving losses there will be more tax saved if the loss is offset against your income rather than split 50/50 as you are paying a higher tax rate. However, if the property is jointly owned the IRD would typically expect you to split the result 50/50. Case law on the point indicates that the split is determined by who is the registered owner of the property, who is liable for the mortgage, and whether contributions to the property are made from matrimonial income.

If you wish to have a partnership arrangement which departs from a 50/50 split you must have a formal partnership agreement and have a valid reson for the different split, eg you have contributed differing amounts of capital, rather than simply agreeing a different split because this achieves the most desireable tax outcome.

The LAQC company and it's new look replacement the Look through company, both require losses to be flowed in the ratio of the shareholding so this arrangement still provides a viable alternative to the partnership without as much doubt over the loss splitting ratio. The company also allows you to both hold the role of director despite potentially having an imbalance in shareholding. 

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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