Help needed with tainting

[orig]

Hi
I need your help and thoughts on this case please

I have 2 entities
First one is LTC entity where me and my wife are both directors owning rental properties for more than 2 years.
Second is a GST registered entity formed April 2011 where I am the sole director, I trade properties under this entity.
I am aware that due to tainting, I will not be able to sell any of my properties under the LTC entity without paying Tax unless I will keep it at least for 10 years.

I lost interest in trading properties and I intend to close the GST registered entity by March 2013.

My question is whether I can sell any of my properties under the LTC entity before the 10 years period without being tainted and without paying the extra Tax?

I will much appreciate your help

[halfempty]

My best advice is this....

Dont take advice on tainting from people on forums.

[spaceman]

Since the investment properties were bought before you started trading they are not tainted..... EOS




Cheers
spaceman....EDIT...not only but also....there is no TEN YEAR RULE

[Simmo]

Again, this is no substitute for professional advice, but as I read it:-

You are liable for income tax whilst trading, so for any property (regardless of which entity it is held in) you sell whilst your trading entity is active, any gain is likely to be deemed taxable.

Once you close your trading entity, trading has ceased so any gain on the sale of properties within the LTC is no longer a taxable activity. However the deciding factor is "intent", this is a very very grey area so if you do sell, you best have some supporting documentation to clarify your intent at the time of purchase.

[spaceman]

^....ummmm not really all that grey at all

Special tax rules for businesses in property-related activities


If you have an association with people in certain property-related industries there may be a tax impact on all or some of your property transactions. even if you personally are not a property dealer, developer or builder.
These impacts could mean the difference in the gain from the sale of a property being treated as taxable income or as a non-taxable capital gain.
Associated person rules may make a property sale taxable when there is an association with a:

• property dealer when the property was bought
• property developer when the property was bought
• builder when significant improvements started on a property.

In addition, the associated person rules changed for land acquired on or after 6 October 2009 with the effect of widening some associations.
For these people, even properties that weren’t bought for business purposes may be taxable if the property is sold within 10 years of:

• the purchase or
• completion of improvements (for builders).

These rules may apply to any properties bought during the period of your property-related business activities, even if you sell a property after you’ve ceased those business activities.

http://www.ird.govt.nz/property/property-common-mistakes/special-tax-rules-businesses/

If he wasn't a property dealer (or associated with one) when the properties were bought...then those properties aren't tainted

Also it matters not that you may have ceased your trading....any properties bought while trading and are tainted remain tainted even if the trading entity is shut down.

The rules around tainting are pretty clear IMHO......the IRD web site explains all.....though to be fair they do use "may" alot....which could be a little confusing i guess.

Cheers
Spaceman

[orig]

Thanks for your reply.
The example on the IRD website clearly state a case where residential properties under LTC were purchased after one establish himself as a property dealer.
My case is exactly the opposite, first I was engaged in rental activity under LTC entity then engaged in trading activity.
Also there is no clue to what will happen if my trading entity is ceased.

[spaceman]

^ The IRD shows where tax is liable to be paid....is your situation mentioned ?????....no??? what does that tell us???.....tells me there is no tax to be paid.

The properties aren't tainted.....so it doesn't matter if the trading entity continues or is axed, why would it???

Cheers
Spaceman

[Rosco]

Since the investment properties were bought before you started trading they are not tainted..... EOS
Cheers
spaceman....EDIT...not only but also....there is no TEN YEAR RULE

First part correct. Tainting occurs at the time of purchase. So if not a trader, or associated with one, at time of purchase, then the property isn't tainted. So if all long term holds purchased before trading commences, then these long term holds aren't tainted.

Second part re ten year rule is wrong. If the LTC purchased another rental after trading had commenced, then just this rental is tainted. So if this rental (tainted rental) was sold within 10 years, it would be taxable.

Ross

[Rosco]

Again, this is no substitute for professional advice, but as I read it:-

You are liable for income tax whilst trading, so for any property (regardless of which entity it is held in) you sell whilst your trading entity is active, any gain is likely to be deemed taxable.

Once you close your trading entity, trading has ceased so any gain on the sale of properties within the LTC is no longer a taxable activity. However the deciding factor is "intent", this is a very very grey area so if you do sell, you best have some supporting documentation to clarify your intent at the time of purchase.

This isn't correct.

[Rosco]

Also it matters not that you may have ceased your trading....any properties bought while trading and are tainted remain tainted even if the trading entity is shut down.
Cheers
Spaceman

Correct again. But if the properties were purchased as long term hold, then 10 year rule applies as above.

Ross

[Rosco]

So overall based on the facts you have listed your Long Term Holds in your LTC aren't tainted. Plus if you cease your trading entity, then you will have no entity to taint any future purchases.

Ross

[orig]

Thank you Ross, I really appreciate your time spent answering this
and thank you all as well for your thoughts.

[spaceman]

....
Second part re ten year rule is wrong. If the LTC purchased another rental after trading had commenced, then just this rental is tainted. So if this rental (tainted rental) was sold within 10 years, it would be taxable.

Ross

Then it should be real easy for you to show us where in the act the "10 year rule" resides n'est-ce pas????????........though to be fair I think you're missing what I meant

Most people say .."if I keep a property for 10 years I can sell it tax free".......this simply isn't true....if you buy it with the intention to resell at a profit and you sell it 11 years later for a profit you will have tax to pay......or as in your example a "tainted rental" it doesn't automatically obecome untainted after 10 years.......this is what I meant by there being no ten year rule

Always ready to be proven wrong, if anybody is up to the challenge of quoting the 10 year rule from the act.

Cheers
Spaceman

[Simmo]

Feck I'm more confused than I was before lol.

Can someone post a link to the actual document, as opposed to factsheets/overviews etc?

[spaceman]

^the act is here

http://www.legislation.govt.nz/act/p...LM1512301.html

Cheers
Spaceman