Individuals vs Company

[chrisgoh]

Hi, need to clarify my doubts about forming company for property investment:

1. Capital gain - NZ has no capital gain tax. Technically if I sell my properties at a profit, I need not pay tax. However, if the properties are owned by company, the gain could be taxed as profit?

2. Estate duty - NZ has no estate duty. In this context, it makes no different if the properties are owned by individual or company?

3. Creditors - Most of the time company directors are guarantors for mortgage loan. What benefits in term of assets protection?

4. Income - Depending on property owners' income levels, tax rates for individuals could be more beneficial than company?

5. Expenses - Can individuals offset property related expenses from property rental income?

6. GST - This is one main benefit I see in forming company for property investment

Is LTC status designed to mitigate some of my doubts? Thanks!

[flyernzl]

If you have a company, you have additional costs.
If you have a company technically you have protection from the companies creditors (e.g. tradies) if it all goes wrong (but try getting a loan from the bank without a personal guarantee).

Yes, individuals can offset property related expenses from the rental income.

If you are talking residential, then that is not a GST-able activity, unlike commercial.

You do need to think if the costs of running a company are outweighted by any benefits.

[RHarris]

Ird don't do a great job in explaining capital gains. Nz does have a capital gains tax regardless of individuals or companies. If you buy a property with the intention to sell it you should pay tax on the profits.

[chrisgoh]

If you have a company, you have additional costs.
If you have a company technically you have protection from the companies creditors (e.g. tradies) if it all goes wrong (but try getting a loan from the bank without a personal guarantee).

Yes, individuals can offset property related expenses from the rental income.

If you are talking residential, then that is not a GST-able activity, unlike commercial.

You do need to think if the costs of running a company are outweighted by any benefits.

Thanks flyernzl. The benefits of company don't look compelling, and the running cost is additional burden. Banks will not approve loan for company's entity without personal guarantee, Forming company is inevitable if investment includes commercial properties.

[chrisgoh]

Ird don't do a great job in explaining capital gains. Nz does have a capital gains tax regardless of individuals or companies. If you buy a property with the intention to sell it you should pay tax on the profits.

Thanks RHarris. My intention is to generate positive cashflow and capital appreciation to hedge against inflation. Flipping or trading properties are not the intend.

[Perry]

It is easy (and largely cost-free) to change directors of a company
that appears as owner on the CoT. Changing (adding/subtracting)
individuals to / from a CoT is more costly.

[chrisgoh]

It is easy (and largely cost-free) to change directors of a company
that appears as owner on the CoT. Changing (adding/subtracting)
individuals to / from a CoT is more costly.

Thanks Perry, you are absolutely right. However, most investors prefer to transfer assets than takeover company as they have no clue what liabilities the company has.

[Perry]

Who said anything about
an external transfer?

[DaveW]

Forming company is inevitable if investment includes commercial properties.

Thats not true. Individuals can be GST registered.

[chrisgoh]

Thats not true. Individuals can be GST registered.

Thanks Dave.

So, the only advantage to form a company (at least for me) for property investment is to protect my assets from creditors other than the banks (personal guarantor for mortgage loan). Since the bulk of creditors are banks, forming company will not be as compelling.

Read somewhere in this forum about Property Relationship Act. Assuming we live by our marriage vow, than there is nothing much to protect against. Perhaps, personal liability insurance is something to consider?

[DaveW]

Thanks Dave.

So, the only advantage to form a company (at least for me) for property investment is to protect my assets from creditors other than the banks (personal guarantor for mortgage loan). Since the bulk of creditors are banks, forming company will not be as compelling.

Read somewhere in this forum about Property Relationship Act. Assuming we live by our marriage vow, than there is nothing much to protect against. Perhaps, personal liability insurance is something to consider?

Hi Chris, I started off doing everything under my personal name until the income got high enough to justify forming a company for the lower tax bracket. It also made my intentions clear because I have company ABC for investment properties and XYZ for trade properties. Depreciation of work tools and vehicles can be done under company. I can't think of any other benefits apart from looking official under a company letter head.

[chrisgoh]

Hi Chris, I started off doing everything under my personal name until the income got high enough to justify forming a company for the lower tax bracket. It also made my intentions clear because I have company ABC for investment properties and XYZ for trade properties. Depreciation of work tools and vehicles can be done under company. I can't think of any other benefits apart from looking official under a company letter head.

Hi Dave, those points are good reasons to form company. Thanks for the insight

[spaceman]

Hi, need to clarify my doubts about forming company for property investment:

1. Capital gain - NZ has no capital gain tax. Technically if I sell my properties at a profit, I need not pay tax. However, if the properties are owned by company, the gain could be taxed as profit?

.......!

This is not correct

Capital gain - NZ has no capital gain tax .....correct

Technically if I sell my properties at a profit, I need not pay tax.....it just ain't so......if you're in the business of buying and selling properties or otherwise tainted you need to pay income tax on any profits made. Regardless of if it's in a company or your own personal name.

However, if the properties are owned by company, the gain could be taxed as profit?................if the company was in the business of renting then there is no tax to pay on capital gains. Again this is the same regardless of it's a company or personal name

Cheers
Spaceman

[chrisgoh]

This is not correct

Capital gain - NZ has no capital gain tax .....correct

Technically if I sell my properties at a profit, I need not pay tax.....it just ain't so......if you're in the business of buying and selling properties or otherwise tainted you need to pay income tax on any profits made. Regardless of if it's in a company or your own personal name.

However, if the properties are owned by company, the gain could be taxed as profit?................if the company was in the business of renting then there is no tax to pay on capital gains. Again this is the same regardless of it's a company or personal name

Cheers
Spaceman

Thanks Spaceman.

So, at the end of the day it boils down to the "intent" instead of "entity". Well noted!

[forbsie]

Tax on capital gain depends on the purpose you purchased the property for.

Buying to onsell for a profit triggers capital gains, buying for the rental income does not trigger capital gains.

There are pitfalls here it pays to have a close look at the IRD rules around developers and the test they use.