Transitioning to an LTC

Our Experts Answer:

Subject to a couple of provisos, you are right to think you are best served transferring your existing two properties into an LTC when buying your new home. Transferring the properties to the LTC and acquiring the new home in a trust (ideally), works well from both asset protection and tax perspectives. You sell the two properties at the total market value of $1.4 million and the LTC is borrower on both the existing $200,000 bank debt and the $1.1 million required to buy the new home. You do not need to set the company up prior to going unconditional but should set up well in advance of settlement.

Now the provisos. The sale of the properties into the company can trigger income tax consequences if the properties have been tainted through past property dealing activity, subdivision, development, or even rezoning. These issues need to be examined before you transfer them into the company. Additionally, the company then acquires the properties afresh, meaning there is a reset five-year bright-line period for the two existing properties (ie: if the company sells within five years you would have a taxable sale).

I see ring-fencing going ahead from 1 April 2019, but it would not dissuade me from recommending the above. Although you may not derive the same benefit in a ring-fencing environment, you still get benefits from asset protection and tax perspectives. There are further intricacies in terms of splitting your borrowing between two banks, which I’m unable to address here. For that, you should seek specific advice.