Depreciation & Setting up an LAQC

[Monid]

Okay guys from reading around and Andrew's advice I think this is now our plan, pay off our house and enough of the equity in our IP's to have enough equity to purchase our next home for us outright.

Then set up an LAQC and sell our current home and IP's to this LAQC, using the money generated to buy our new house outright, at the cost of putting back paying off our IP's somewhat.

1. Obviously selling the IP's to the LAQC will trigger depreciation clawback.
Can the LAQC afterwards start claiming depreciation though?

2. And if so would this be on the basis of whatever the sale price is?

3. And finally if so wouldn't I be better off to achieve as high a price as might be seen as reasonable given the market?

Thanks in advance
David

[cube]

Hi,

1. Yes, the LAQC will be able to claim depreciation from the date of sale.
2. The basis will be the chattel/building values at time of sale to the LAQC, as for any 'normal' purchase.
3. The most effective way of ensuring you claim maximum depreciation is to have a chattels valuation, or Apportionment for Depreciation, completed by Valuit or similar organisation when you buy/sell. I'm sure that they will be able to advise you on this.

Good luck

cube

[RentMaster]

Re: Depreciation & Setting up an LAQC

3. And finally if so wouldn't I be better off to achieve as high a price as might be seen as reasonable given the market?

If you are selling a rental property from yourself to a LAQC company, then a higher price would mean you would have more depreciation clawback in the short term.

Probably best to run the whole idea past an accountant first.

[CJ]

Re: Depreciation & Setting up an LAQC

2. And if so would this be on the basis of whatever the sale price is?

I think there are associated party rules which mean it the cost base is the purchase price of the original purchaser (if assocated with the new owner). You will therefore need to apply to the IRD to have the cost base increased to the market value.

[Warren]

Hi David,

Cube is correct in his response to your queries.

I would like to touch on the thorny issue of transferring between yourself and your LAQC and pick up from CJ and Rentmaster.

The Associated Party Ruling from the IRD, in basic terms, says that when transfering properties between related entities that you must use the lower of

1. the original purchase price or
2. the transfer price

for depreciation purposes.

We understand that it is possible to apply to the Commissioner of the IRD to use the transfer price as the price to calculate the depreciation off of. In the current market the transfer price is normally higher than the original purchase price. This in theory means that you will be able to obtain more depreciation out of the property. However, you must be able to substantiate that the transfer price was a "fair" transfer price. There are various ways of doing this.

Note that there is a fine line between minimising your tax liability and tax avoidance (which is frowned upon by the IRD).

We recommend that you talk to a specialist property accountant before you look to change your situation. While they may cost you a few more $$$ in the short term they are normally worth it in the long run as you get correct advice from day one.

Feel free to call me in Auckland to discuss this further or contact one of our local representatives via our toll free number. Alternatively see our website www.valuit.co.nz.

regards

[Monid]

Thanks Warren

this is all several years in the future, but when/if the time comes I will consult a property specialist accountant. We are basically just sounding out the idea so we can figure out how to set things up now.

Cheers David

[JetBlue]

Dear All,

What is LAQC stand for?

I asked this question before but at this stage no one answer.

I am new to NZ investing so please bare with me!

[cube]

Hi JetBlue,

LAQC Stands for Loss Attributing Qualifying Company.

Normal Limited Companies are Qualifying Companies (not sure what they qualify for!). An LAQC can attribute its losses (hence the name!) to the shareholders, in direct proportion to their shareholding.

This means that company losses can be offset against the personal income of the shareholders, reducing their tax bill.

Normally, a company can only sit on its losses, waiting for the time that it makes a profit!

Hope this helps

cube

[JetBlue]

Cube,

Thank you very much. It does help a lot.

[CONZ]

IP's

Hi There

I am also new to Property Investment and would like to know what IP's mean as mentioned by David.

Regards

CONZ

[muppet]

Hi CONZ

Welcome to the forum.

IP = Investment Property or the property being looked at to buy as an investment.

Regards

[CONZ]

IP's

Hi Muppet

Thank You. I figured it out once I looked at other forum topics later this morning.

Excuse me for my ignorance.

Cheers

Conz