Personal ownership vs LTC

Question from Will updated on 9th August 2019:

I recently bought a new house and moved into it. I have rented out my old home which is my first home that I bought four years ago. I know that if I set up an LTC and sell the rental house to it, I would have better tax benefits.

My question is: Say I do that and then five years later I demolish the old house, build two new houses on the land and then sell them. Would I be considered a property dealer and taxed for capital gains ? My understanding is that if I keep the old house under personal ownership I won't be taxed when I sell it years later no matter what I did with it (develop, re-build, subdivide etc).

However I'm not sure if it's still the case if the house had been sold under an LTC.

Our expert Matthew Gilligan responded:

The trickiest part about this question is that nobody knows what the law is going to be in five years’ time. It could be that we are looking at a blanket capital gains tax by then, which probably means it would make no difference whether you owned the property or via an LTC.

What I can say though is under current law, there are some advantages in holding a property personally when you conduct the subdivision or a development, but most of those only emerge in the context of a property that is your private residence. It is certainly not fair to say that if you continue to hold your old home personally that any future development of it will fall outside the tax net. But nor am I saying that the converse is true and that any gain will be taxable.

What I am saying is that personal ownership does not provide you with a silver bullet in allowing you to sell the property in the future without tax applying to any gain. Put simply, where you engage in a development that involves the construction of two new houses on a piece of land for sale, there are highly likely to be income tax consequences whether you own the property personally or via a company. That sort of thing can also be subject to GST.

Therefore, I would think that moving the property into a company may be the better way to go. Having said that, one point of difference between personal ownership and company ownership is that moving the property into company ownership now would trigger a restart of the five-year bright-line rule. Thus, if there were any possibility of you selling the property within five years without developing it, then you would likely be better off holding it personally.

This is a very complex area of the law and I recommend you see a competent accountant to get specific tax advice to match your circumstances.

Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.

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