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Transferring house from GST registered trading co to LTC

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  • Transferring house from GST registered trading co to LTC

    I have a property I initially bought with the intention of trading after a reno through my trading co. My situation has now changed and I now have decided I'd like to keep the house.

    What process do I need to go through to move it over to the LTC and at what price can the LTC "buy" it for?

    I have claimed GST already on it and have not hit my next GST return date yet.

    Any help appreciated.

    James

  • #2
    Hi jrad,

    You need to think this through carefully!

    1) GST will be repayable at fair market value

    2) This property was purchased with the intention of selling for a profit. So even though you are selling to a new entity, it remains tainted under the association rules, and the gain will always be taxable. ie no 10 year rule, as this is a trading property.

    Still want to keep it?

    Ross
    Book a free chat here
    Ross Barnett - Property Accountant

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    • #3
      And, you will have to pay tax on any profit after being sold at fair market rate.

      Ross
      Book a free chat here
      Ross Barnett - Property Accountant

      Comment


      • #4
        Originally posted by Rosco View Post
        You need to think this through carefully!

        1) GST will be repayable at fair market value

        2) This property was purchased with the intention of selling for a profit. So even though you are selling to a new entity, it remains tainted under the association rules, and the gain will always be taxable. ie no 10 year rule, as this is a trading property.

        Still want to keep it?
        Yes I do want to keep it as I am thinking ahead for my daughter and school zones etc.

        So if I understand correctly, get the place valued, sell it to the LTC at this price and pay GST and income tax on the sale price. Then, say 11 years down the road I decide to put it on the market, I will pay tax again - even though my new intention is to keep it and I've paid my tax on the "trade intentions".

        The rules seem a bit unfair. If my initial intent is to buy and hold, then my intent changes, the IRD have their way and I am stung with tax. However vice versa I am still stung. Guess you can't avoid the tax man ay..!


        Originally posted by Rosco View Post
        And, you will have to pay tax on any profit after being sold at fair market rate.

        Ross
        So what about I just keep it in the trading co and rent it for now with the ultimate intention of selling. Any implications?
        I am willing to accept the fact I will pay GST and Inc tax on it given what I was intending but it's not worth the hassle and expense if I have to pay twice!

        Thanks
        James

        Comment


        • #5
          Originally posted by jrad View Post
          The rules seem a bit unfair. If my initial intent is to buy and hold, then my intent changes, the IRD have their way and I am stung with tax. However vice versa I am still stung. Guess you can't avoid the tax man ay..!
          Hi James,

          Actually, if you bought with the intention of buy and hold, and given that you are not already tainted, then you decided to sell you will *not* be stung with tax. However, your future properties purchased will be if you sell them as you would become tainted.

          I could be wrong, however, as I am no accountant but this has always been my understanding.

          Regards,

          BD
          www.PropertyMinder.co.nz
          # Property Management
          # Ad Hoc Tenancy Services / Rental Inspections / Terminations and Notices

          Comment


          • #6
            You can fix this with structuring jrad. Go and see Gilligan Rowe or someone similar who specialises in rogering IRD. It can be fixed.

            Comment


            • #7
              Sorry BigDreamer, your comments are not right. Initial intention (in first line) was to trade for profit, so is taxable.

              With trading properties it is difficult to convert to long term hold, as your long term entity is associated to the trading one. Most people just hope to never get caught on this and hope IRD will forget (they might not too!). There is CB 16, an exemption for personal house, which based on your daughter could be an option to look at further. Key part would be "mainly as a residence". So if this was rented to tenants, for most of the time, then probably wouldn't fit CB 16 exemption.

              If you keep in GST entity, then obviously your GST could be a lot higher if you keep for a number of years. Vs if you change to hold entity now, you pay GST on fair market value now.

              If you keep in GST entity, you will have to do GST adjustments, over next few years, and effectively pay GST back anyway.

              You won't pay tax twice. (really simple example, and I have excluded GST to keep it very basic)
              - buy for $500k
              - sell for $600k to long term hold entity. Pay tax on the $100k profit
              - sell for $900k in 12 years . Pay tax on the $300k extra profit

              Ross






              CB 16 Residential exclusion from sections CB 6 to CB 11

              • Exclusion

                (1) Sections CB 6 to CB 11 do not apply if—
                • (a) the person—
                  • (i) acquired the land with a dwellinghouse on it; or

                  • (ii) acquired the land and erected a dwellinghouse on it; and

                • (b) the dwellinghouse was occupied mainly as a residence by—
                  • (i) the person and any member of their family living with them; or

                  • (ii) if the person is a trustee, 1 or more beneficiaries of the trust.


                What exclusion applies to

                (2) The exclusion applies to the land that has the dwellinghouse on it. It also applies to land related to the land that has the dwellinghouse on it if the total area of the related land is—
                • (a) 4,500 square metres or less; or

                • (b) more than 4,500 square metres, if the larger area is required for the reasonable occupation and enjoyment of the dwellinghouse.


                Who exclusion does not apply to

                (3) The exclusion does not apply to a person who has engaged in a regular pattern of acquiring and disposing, or erecting and disposing, of dwellinghouses.

                Defined in this Act: dispose, land, trustee
                Compare: 2004 No 35 s CB 14
              Book a free chat here
              Ross Barnett - Property Accountant

              Comment


              • #8
                Ross, my reply was not related to the original post which he clearly mentioned he bought with the intention to trade but rather to the second post with the hypothetical scenario if someone bought with the intention of buy and hold.
                www.PropertyMinder.co.nz
                # Property Management
                # Ad Hoc Tenancy Services / Rental Inspections / Terminations and Notices

                Comment


                • #9
                  Sorry to jump in on thread, but perhaps it may shed some extra light on the subject...

                  We are in a similar position - have purchased land with intention to build a spec house to sell, however would like to rent out now as it is cashflow positive and strong rental demand. No point transferring to another entity as we are tainted as developers and would have to pay gst and tax anyway - is that right? Or if we paid the gst back now (or through adjustments) on the building cost would we only have to pay tax on the sale price and not gst?

                  Thanks in advance for any advice.

                  Comment


                  • #10
                    Go and get some advice. It is fixable no problem you just need proper advice. No one is going to post it here in a public forum :-)

                    Comment


                    • #11
                      Originally posted by BigDreamer View Post
                      Ross, my reply was not related to the original post which he clearly mentioned he bought with the intention to trade but rather to the second post with the hypothetical scenario if someone bought with the intention of buy and hold.
                      Sorry for misunderstanding your post. Normally I wouldn't jump all over it like that, just didn't want to confuse other readers. In your Hypothetical answer, this person would have been trading, so would be governed by the 10 year rule. So a trader buys a long term hold, has to keep for 10 years otherwise gains are taxable.

                      Ross
                      Book a free chat here
                      Ross Barnett - Property Accountant

                      Comment


                      • #12
                        Originally posted by Damap View Post
                        Go and get some advice. It is fixable no problem you just need proper advice. No one is going to post it here in a public forum :-)
                        I agree with getting full advice, but be aware there isn't an easy fix to the tax. The property is always taxable! Only exception is for personal house as mentioned above or business premises. Otherwise there are some holes in the association rules, but IRD would most likely view structures that specifically break these rules as tax avoidance anyway, and still deem taxable.

                        hmsid and jrad;
                        Advice can help with whether you want/need to move from the trading entity, the GST implications and fully explaining the tax options and implications. Also the GST adjustment rules if you hold this property as a rental.

                        But, think hard why you would want to keep this as a long term rental. lets compare to rentals

                        1) Your rental that was a trade - gains are always taxable. So say cost $500k sell for $1 million in 25 years, pay $165k tax approx. So left with $335k gain after tax

                        2) Buy a new long term hold - still tainted for 10 years and taxable if sold in that time. Say cost $500k and sell for $1 million in 25 years. No tax. So left with $500k gain after tax.

                        With 1), you will need to repay the GST now if you sell to a new entity, at market rate.. If you keep in trading entity , then have to do GST adjustmnets over next 5 or so years, that will effectively repay the GST. But when ulitimately sell, still need to pay the extra gst too. ie gst adjustments repay GST on $500k, but then you sell for $1 million, so have to pay further $65k in GST.

                        Ross
                        Book a free chat here
                        Ross Barnett - Property Accountant

                        Comment

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