Selling my property to my kids' LAQC

Question from raana te weehi updated on 9th March 2007:

My family trust is selling a property to a LAQC, owned by two of my children, who are also beneficeries of the trust. My accountant has said that the trust has to pay a depreciation clawback tax of $12,000 dollars. Is there another way of minimising this payment?

Our expert responded:

In this case, the sale is what is called a related party transaction. This means that the two parties conducting the transaction are related in some way. The tax rules surrounding transactions such as this are quite specific in that they are meant to be done at 'arm's length'. That's a fancy term for you must sell the property to your children's LAQC at market value or the IRD could deem some gifting has occurred and charge you gift duty which can be quite expensive.

Another way to look at it is that if the property is worth, say, $200,000 and you wouldn't sell it to me for $170,000, then you shouldn't sell it to your children's LAQC for $170,000 either. The best way to determine market value is to get a registered valuer to do a valuation on the proeprty, and then there can be no argument as to market value as you used an independent party to determine the price.

In terms of reducing the depreciation recovered, this depends on how you depreciated the property in the first place. I suspect the depreciation was done originally as only breaking out the land and building cost, plus any improvements you may have added over the years. In which case, you can use the registered valuation to apportion the values on sale.Or, if you had a full chattel valuation done, you can get another chattel valuation done and that will give the value of the chattels as at sale.

Reducing the depreciation recovered all depends on how much the property value has increased by. If there's only been a slight increase, reducing the depreciation recovered is relatively simple using what I have outlined above. If on the other hand, the value has doubled or tripled, trying to reduce the depreciation recovered is difficult at best.

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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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