Transferring to LAQC, should I change ownership to my company?
Question from Johnny updated on 4th October 2006:
Our expert responded:
I am assuming you own the investment property in your personal name at this stage and your question arises because in transferring the property to the LAQC, you are unsure as to whether or not you should change the structure of the mortgage. I am also assuming you have a current valuation to establish the value at which you are transferring the property to the LAQC. Regardless of what the banks may accept, we need to consider your question from a tax point of view. Firstly, if the investment property is owned by an LAQC, yet the mortgage is owned by you, the interest on the mortgage will not be tax deductible. You will have the situation whereby you have your rental income and you can only offset against that the depreciation, insurance, rates, property management fees and so on, but not the interest. The interest belongs to you, not the company. It’s therefore highly likely that you will be in a tax paying position. The only way to get around this is for you to charge the company interest, however this adds ongoing complications of filing additional returns for resident withholding tax and there are cash flow implications. However, if you transfer the mortgage to the LAQC, you will have none of these issues for a one off conveyancing cost from your solicitor. Believe me, there is a substantial ongoing cost for you in not dealing with this properly versus trying to save some dollars up front. There should no costs from the accountant in relation to the transferring of the property to the LAQC other than preparation of accounts. If the property has been treated as a rental property under your own name, then two sets of accounts will need to be prepared, one for you and one for the LAQC, assuming no other properties are involved. For that reason, you are better off doing this at year end to save the cost of preparing two sets of accounts.
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.