Weighing up restructuring
Question from Himani updated on 13th January 2020:
I have a home in Auckland: the GV is $900,000 and we have a loan of $544,000. We purchased an investment property in Invercargill in 2018. The loan on that property is $350,000 and it is on interest only. The rent from the rental property is covering almost all the expenses and interest payments. We have been advised to transfer the rental property to a LTC. Is it wise to transfer the property to LTC or what structure can we have in place?
Our expert Mark Withers responded:
I assume the home in Auckland is your own home and it is not being rented. And I presume the restructure you are doing is to increase the deductibility of interest in the LTC. There are now a number of issues with this.
Firstly, tax avoidance: if the company is owned by the same people that own the property now the transaction could be seen as being motivated solely by defeating the incidence of tax. You would need a genuine commercial reason to avoid the suggestion of tax avoidance, like a wider estate planning exercise for your own home as an example.
Secondly, the sale must be at market value. If this represents a gain you will need to confirm you have owned it long enough to avoid the bright line test, if not you will be up for income tax on the gain. Even if you have, the bright line is reset to five more years on transfer to the company.
Lastly, the gearing up of the property in the LTC may mean losses are generated. These losses are now ringfenced under the government’s residential loss ring fencing law effective 1 April 2019. This means that while you may have increased the interest claim, any resulting loss will be ring fenced until you can make the property profitable again.
There’s so much to weigh up before restructuring these days.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.