Setting up an LTC
Question from CF updated on 8th November 2017:
We are a couple on one income and my wife looks after the children at home. I have a mortgage-free family home (market value $340k) and also one rental on interest only ($190k, market value $260k) and both properties are under my name only.
We are planning to purchase a bigger home for ourselves and need to borrow $375k from the bank.
We can purchase a new home without selling our current house, and we would also like to keep our own house and rent it out after we purchased our new home. Can I setup a LTC, with me and my wife 50/50 having shares, after I buy our new home and sell our old home and my other rental to LTC?
With the proceeds of the sale I will have enough cash to pay off our new home loan. At the end we can live in a mortgage-free home and interest payment also deductible.
Is this the best way to structure our loan in our situation, because I don’t want later on IRD come knock on my door?
Our expert Mark Withers responded:
Firstly, your structure will have no bearing on whether IRD will come knocking on your door, this is always possible! Secondly, bear in mind that our new Labour government promised in their published pre-election manifesto to remove the ability to offset tax losses against other income, ban negative gearing in effect.
To achieve this they will have to repeal the LTC legislation as this currently allows company losses to be flowed to the shareholders return. That said, IRD have signalled that it is acceptable tax planning to sell a previous home to a LTC and rearrange your affairs to take the equity to a new home, so I don't see any problem there.
I do have some reservations about doing this with the rental though, as this could simply be seen as tax avoidance designed solely to ratchet up your interest deduction. To be a legitimate restructure there must be genuine commercial reasons for the change. One possibility would be entering a matrimonial agreement to equalise the ownership with your wife and give effect to this by transferring the property to the jointly owned company. This would help validate the transaction but will ensure she gets 50% of the losses until the rules change. Remember also that the sale to the LTC will trigger depreciation recovery on the rental if you have any accumulated and it will also trigger and restart the two year bright line test clock that is shortly to become 5 years.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.