Pros and cons of LAQC

Question from Miriam Eagle updated on 7th May 2007:

We have just purchased a rental property and are looking at the pros and cons of a LAQC. Currently the property is in both our names and both of us are in the high salary bracket. Having read about the tax rebates that may come with running to a loss, is there any tax that we would have to pay (either under the LAQC or not) when we sell the property?

Our expert responded:

Whether or not you purchase the property in your own names or an LAQC, if you sell a property for which you have claimed depreciation, there is more than likely going to be depreciation recovered. When we buy a property and claim depreciation, it is based on what we think is happening to the value of the building and chattels with fair wear and tear. In many circumstances, assets go down over time. For example, a car if bought brand new, will decrease in value over time. Rather than just having this decrease in value over time occur at the point of sale, we are allowed to claim an allowance for the value of the asset going down over time each year based on preset percentages by Inland Revenue.

Then at the point of sale, we compare the actual value (that is, what we sold it for), to our theoretical value (that is, the book value) based on claiming the allowance for the decrease in value. If the sale value is more than our book value, then we obviously claimed too much depreciation over the years, and we now have to pay that back. If our sale price is less than our book value, then we didn't claim enough depreciation and so we make it up now by having an additional expense called a 'loss on sale'. If you currently own the property in your personal names, it would be best to take some advice reagrding your particular situation as to whetehr or not to leave it in your own name, or to transfer it into an LAQC.

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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