Correct structure for moving PPOR to rental?

[richard56]

Hi
Current structure is two rentals owned by LTC and PPOR privately owned by the Director.

If you wanted to move into one of the rentals and rent out the PPOR what is the correct way to restructure things?

I understand about having to sell the PPOR at market rate to the LTC.

But what do you do the the rental that you are moveing into and making your new PPOR ?

Do you just make sure that you don't claim any more expenses against that property and it remains
owned by the LTC.?

Or is there a better way?

Thanks
Richard

[spaceman]

Do you have a partner that isn't a shareholder in the LTC????

If so rent the property to the partner and continue to claim all expenses......partner isn't part of the LTC and the LTC can rent to whoever it wants.....at market rents of course.

Sell PPOR to LTC ..... get valuation done to maximize value of depreciable items ....carpet drapes etc and write them into S&P ....since it's not an arms length transaction you'd be very brave to do without a proper valuation.

I've never had an LTC so I'm unsure as what to do about renting it to yourself or your partner if you both own shares...... If you pay market rates you may well be able to still claim all expenses.....most would say you can't right off the bat....I'm not so sure.

Good luck
Cheers
Spaceman

[Rosco]

Revenue Alert RA 07/01


Explanation: Status of release


A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about significant and/or emerging tax planning issues that are of concern to Inland Revenue. At the time an alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses.


A Revenue Alert will identify:


the issue (which may be a scheme, arrangement or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy;
the common features of the issue;
our current view; and
our current approach.
An alert should not be interpreted as being Inland Revenue's final position. Rather, an alert outlines the Commissioner's current view on how the law should be applied. For any alert we issue it is likely that some investigatory work has already been carried out.


Issue: The sale of private homes to loss attributing qualifying companies to generate tax deductions.


Some loss attributing qualifying companies (LAQCs) are causing us concern. Those of most concern involve people selling their own or family home to a LAQC, then renting the property back to themselves and claiming tax deductions for the property that would otherwise be considered to be private expenses.


Features


The arrangements we are concerned about typically have these features:


A person owns their own home;
And sets up a LAQC and becomes the sole or controlling shareholder;
They then sell their home to the LAQC or have the LAQC purchase a home for them;
And then rent the property from the LAQC at a market rate;
The LAQC claims income tax deductions for normal property costs, including maintenance, depreciation, interest, rates, and insurance. In total these expenses exceed the rental income. The loss is then attributed to the shareholders under the LAQC rules, and they offset this loss against their other income.
Current view


Our current view is that this type of LAQC is a tax avoidance arrangement and will fall under section BG 1 of the Income Tax Act 2004, as many of the expenses would not be deductible if the home was personally owned because the Act does not intend that private expenses can be deducted.


To determine whether a particular LAQC has resulted in tax avoidance we review the arrangement to determine the purpose or effect of setting it up and whether it is consistent with the relevant tax laws.


We will also look at how the LAQC reduces or defers a tax liability, whether it is commercially realistic, and whether it is deducting expenses which would normally be considered private or domestic expenses.


We acknowledge that section BG 1 might not apply to all instances where a home is rented from a LAQC. We review each case on its own facts and cases are independently reviewed before a final decision is made.


Current status


We have already investigated a number of LAQCs and will continue to do so.


Where the Commissioner considers the arrangement to be tax avoidance, those deductions that are considered to be private or domestic expenses will be disallowed. This is likely to mean past returns will be reassessed. Taxpayers are able to dispute these new assessments and the matter may ultimately be decided by the courts.


Taxpayers who are reassessed may also be liable to late payment penalties and Use of Money Interest may also be applied. In addition, shortfall penalties of up to 150% may also apply, although these may be reduced where a voluntary disclosure is made. Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and Standard practice statement INV-251 Voluntary Disclosures (April 2002).


Going forward


If people have entered into an arrangement similar to the one described above, or are thinking about entering into such an arrangement, they should talk to their tax advisor and/or to Inland Revenue for advice about the likely tax implications.


References to consider


The following references will help customers to determine whether their particular LAQC is subject to the avoidance provisions in the revenue Acts.


Standard practice statements: INV-251 Voluntary Disclosures (April 2002).
Other policy statements: Appendix C - Explanation to the application of section 99 of the Income Tax Act 1976 Tax Information Bulletin Vol. 1, No 8 (February 1990).
Consequential amendments to Part G - Avoidance and non-market transactions Tax Information Bulletin Vol. 8, No 9 (November 1996).
Revenue Alerts items: N/A.
Date issued: October 2007
Authorised by Martin Scott,
Group Manager
Assurance
Contact (via email): [email protected]
Media queries: [email protected]
(04) 890 1698


Other pages in: Revenue Alerts
Revenue Alert RA 14/01
Revenue Alert RA 13/01
Revenue Alert RA 11/03
Revenue Alert RA 11/02

[Rosco]

Hi Richard,

As per the above Revenue Alert, IRD have an issue with people owing their personal home under an LAQC/LTC and renting to themselves.

If you were doing this for a very short period (3-6 months), and paying full market rent, then would be OK, as the aim isn't to generate a tax deduction from your personal house.

If a short period, you could look at keeping the house in the LTC, but not returning any rent or claiming any expenses. This isn't ideal, but does stop you creating a tax advantage from your personal home.

So main question, is how long are you planning on using this house in the LTC for?

Next question, is your existing personal house a good rental? What is the Gross Yield, what is the overall cashflow like, are the gardens easy care, is there low future r&m and what is your opinion of the future capital gain? Often it is better to sell the old personal house, and buy a specific rental property that meets your objectives.

If you are still looking at keeping the old personal house, you will most likely need to get expert advice about transferring it to the LTC, and getting the other house out to reduce the amount of non deductible interest. Everyone's situation is different, so it is better to pay for specific advice for you. I only recommend GRA or ourselves for this kind of advice, but definitely use a Chartered Accounting firm and one who specialises in property.

Ross

[richard56]

Hi
Thanks for your reply.

There are 3 property's 1 rental and 1 PPOR in Auckland and 1 rental in Christchurch.

"Possible" retirement plan would be to retire in Christchurch. Hence the need to sell PPOR in to LTC.

The old PPOR would get good rent and make an easy to run rental property.

As the Christchurch property would no longer be used as a rental,and I would be living in it long term, I suppose the "cleanest" solution would be for the LTC
to sell the Christchurch property into a newly formed Family Trust.

But the incurs the additional conveyancing cost of selling to the Trust.

Whereas leaving it in the LTC and just not claiming expenses or returning any rent would save that cost.

I am not trying to create a tax advantage just save conveyancing cost.

I am probably going to answer my own question now by saying...for the cost of the conveyancing I save my self any possible Tax problems....probably the cheapest long tern solution.

Unless someone can think of another way?
Thanks
Richard

[spaceman]

........

Issue: The sale of private homes to loss attributing qualifying companies to generate tax deductions.


Some loss attributing qualifying companies (LAQCs) are causing us concern. Those of most concern involve people selling their own or family home to a LAQC, then renting the property back to themselves and claiming tax deductions for the property that would otherwise be considered to be private expenses.
......
A person owns their own home;
And sets up a LAQC and becomes the sole or controlling shareholder;
They then sell their home to the LAQC or have the LAQC purchase a home for them;
And then rent the property from the LAQC at a market rate;
The LAQC claims income tax deductions for normal property costs, including maintenance, depreciation, interest, rates, and insurance. In total these expenses exceed the rental income. The loss is then attributed to the shareholders under the LAQC rules, and they offset this loss against their other income.
Current view


We acknowledge that section BG 1 might not apply to all instances where a home is rented from a LAQC. We review each case on its own facts and cases are independently reviewed before a final decision is made.


Current status


If people have entered into an arrangement similar to the one described above, or are thinking about entering into such an arrangement, they should talk to their tax advisor and/or to Inland Revenue for advice about the likely tax implications.
....

The bits highlighted in red didn't happen ...so surely stuff relating to those bits don't apply.

You could argue the bit in blue did happen, but it's clearly also possible to argue it didn't. Especially if the LTC has owned the property for some time and rented it out prior to to richard56 moving in ....years would obviously be better...weeks and you're probably asking for trouble.

The bits in green are the most important IMHO

Cheers
Spaceman