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Look Through Company for my 2 rentals?

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  • Look Through Company for my 2 rentals?

    Hello all,

    Would love to hear your opinions on this as I've been receiving mixed and unclear feedback from different professional sources.

    I've been to see Gilligan and Rowe and have been told to set up an LTC for my new purchases (have not settled yet). My broker isn't too fond of the idea for our situation. I've read a lot of forum posts and a lot of info on LTC and I think I'm too daft to understand.

    My partner and I have the same tax bracket and likely to remain so for the next 2 years. I'm not seeing how and why the LTC benefits us and I'm also not seeing the disadvantages (complications maybe?). The 2 rentals will be negatively geared, but with a slight rent raise, they'd both be neutral to positive.

    Was suggested that having the LTC owning our rentals would help us purchase our next personal home property - and something about being able to claim tax on our personal home this way? I don't get how this works and have not found any info on it. (To clarify, we don't own a personal home and is our next goal.)

    Thanks in advance!!!!!!!!!!!!!!!!!!!!

  • #2
    Hi Acandria,

    There is no one perfect answer for all property investors.

    GRA are very good, and you could get a second opinion but it is unlikely to be better than the advice you have already received from GRA.

    Helping with personal home - Say you put in $200,000 into the LTC to buy the first rental. And then put in $20,000 over the next year, and $20,000 the following year. Then at a later stage , from a tax perspective the LTC could borrow $240,000 to repay your current shareholders current account, and then you could use this to buy your personal house. Obviously the bank would still need to approve the lending and you would need enough equity and cashflow, but the LTC can help getting more of a tax deduction on interest borrowed.

    I would suggest clarifying with GRA, and asking them to explain a little further.

    Ross
    Book a free chat here
    Ross Barnett - Property Accountant

    Comment


    • #3
      Originally posted by Rosco View Post
      Hi Acandria,

      There is no one perfect answer for all property investors.

      GRA are very good, and you could get a second opinion but it is unlikely to be better than the advice you have already received from GRA.

      Helping with personal home - Say you put in $200,000 into the LTC to buy the first rental. And then put in $20,000 over the next year, and $20,000 the following year. Then at a later stage , from a tax perspective the LTC could borrow $240,000 to repay your current shareholders current account, and then you could use this to buy your personal house. Obviously the bank would still need to approve the lending and you would need enough equity and cashflow, but the LTC can help getting more of a tax deduction on interest borrowed.

      I would suggest clarifying with GRA, and asking them to explain a little further.

      Ross

      Thank you for you response Ross,

      GRA are a bit too pricey unfortunately!!

      I don't quite understand how the example you gave (i.e. putting in x amount a year then LTC borrows the total) is different from what you could do if you owned the rental properties personally? How does it help getting more tax deduction? If this is too big of a question then no worries!

      In my situation, I'm likely to be in a higher tax bracket from my partner in a years time, does this mean we should set up the shares to reflect this now? Moving shares around between the two of us incurs depreciation recovery? - is this the only complication?

      If our rentals becomes positively geared, how does this affect our LTC? I'm not really seeing a real disadvantage in having an LTC to be honest. (on-going costs?)

      Really appreciate your time

      Comment


      • #4
        If both of you are in the same tax bracket, then holding the rentals under partnership is also ok. ie 50/50 ownership.

        If your income is likely to increase more than your partner's maybe increase your share more. However, it depends on the incomes you both have.

        Lets assume your rentals will bring in negative $10k per year.

        If you have say $85k income per year before tax, then 15k of that is in the top tax bracket. If your partner has say $75k income per year before tax, then 5k of that is in the top tax bracket.

        If your shareholding in the LTC is 99%, and your partner is 1%, then that 10k loss on rental will offset most of your 85k salary. So you get 33% of the 10k back.

        If your partner has 99% shareholding instead, then his effective net income will drop to 65k, so you will get less than 33% of the 10k rental loss back, because only 5k loss will be in the top tax bracket, and the remaining 5% is in the 30% bracket.

        So without knowing more about your financial details, I can see why GRA has recommended going to LTC instead of Partnership.


        PS: Since you sound like a beginner investor, GRA (from what i have heard) does cost an arm and a leg, so perhaps pay for Rosco's time via skype to go through it at a far more reasonable cost?

        Comment


        • #5
          Originally posted by Gary Lin View Post
          If both of you are in the same tax bracket, then holding the rentals under partnership is also ok. ie 50/50 ownership.

          If your income is likely to increase more than your partner's maybe increase your share more. However, it depends on the incomes you both have.

          Lets assume your rentals will bring in negative $10k per year.

          If you have say $85k income per year before tax, then 15k of that is in the top tax bracket. If your partner has say $75k income per year before tax, then 5k of that is in the top tax bracket.

          If your shareholding in the LTC is 99%, and your partner is 1%, then that 10k loss on rental will offset most of your 85k salary. So you get 33% of the 10k back.

          If your partner has 99% shareholding instead, then his effective net income will drop to 65k, so you will get less than 33% of the 10k rental loss back, because only 5k loss will be in the top tax bracket, and the remaining 5% is in the 30% bracket.

          So without knowing more about your financial details, I can see why GRA has recommended going to LTC instead of Partnership.


          PS: Since you sound like a beginner investor, GRA (from what i have heard) does cost an arm and a leg, so perhaps pay for Rosco's time via skype to go through it at a far more reasonable cost?

          Hi Gary,

          Thanks for your reply! That all makes sense to me. Though wouldn't the example you gave be the same for a couple with a joint account and every year you just decide whose tax bracket the deduction comes from? Am I totally off?

          In any case, I will need to pay for a professional to set up the LTC for me, GRA charges about 800 dollars for this!
          I can't see any real disadvantages, yet having a look a forum and googling, it seems a lot of people are against it and would rather own it personally (including my broker, Gilligan called it novice mistake!)

          Comment


          • #6
            Often you can set up the LTC yourself, which only costs $155 for company office charges.

            I would suggest either spending more time with GRA or have an initial meeting with me, and gain the answers to all your questions, then with this information you can probably set up the LTC yourself. So spend $245 incl GST on more advice, but save $650 approx on the set up!

            Ross
            Book a free chat here
            Ross Barnett - Property Accountant

            Comment


            • #7
              Problem with it is the shareholding at the LTC inception is fixed. After that you cannot change the shareholding (IRD aren't stupid...) very easily.

              So you cant just decide (as a shareholder/director) whose tax the loss should offset. It is all to do with the shareholding structure set in stone.

              Regarding your broker, he's expert (should be) in lending, but he's not really qualified to give out accounting tips.

              Comment


              • #8
                Your next move should be:
                1) sit down with your partner and project your likely incomes for the next 10 years (are you planning kids in the future?)
                2) project how your rental income/loss would be in these 10 years? if you start making profit in year 3, then you want the partner with the least income having the higher shareholding. If you plan to make loss for the full duration, then you want the partner with the most income with the higher shareholding
                3) then talk to a CA about your projections
                4) then choose LTC or Partnership or a trust

                PS: there are very good reasons why CAs deserve to be paid highly!
                Last edited by PTILoveYou; 09-07-2015, 02:26 PM.

                Comment


                • #9
                  Originally posted by Gary Lin View Post
                  Problem with it is the shareholding at the LTC inception is fixed. After that you cannot change the shareholding (IRD aren't stupid...) very easily.

                  So you cant just decide (as a shareholder/director) whose tax the loss should offset. It is all to do with the shareholding structure set in stone.
                  I thought the point of it was so that you can change how much shares each person gets (gradually)? i.e 99% shareholding to me and 1% to my partner but If i were to stop working due to having children then we'd switch to me having 1% and him 99% over time?

                  Comment


                  • #10
                    Originally posted by Acandria View Post
                    I thought the point of it was so that you can change how much shares each person gets (gradually)? i.e 99% shareholding to me and 1% to my partner but If i were to stop working due to having children then we'd switch to me having 1% and him 99% over time?
                    You should talk to a CA about that.

                    You can't just change the shareholding at will, there are consequences, like trigger depreciation clawback etc.

                    Comment


                    • #11
                      I will definitely talk to a CA. Just trying to wrap my head around some basic concepts as I have little experience in...life in general I suppose. I understand the depreciation recovery that may incur but i thought being able to allocate shares was one of the 'benefit's compared to other structures?

                      I have one last daft question I need clarification on and i'll stop bothering you!!

                      My parents, mum&dad investors, have a few properties. Dad earns more than mum and they don't have an LTC and all the losses seem to offset my dad's income only. Mum said her accountant 'asked again who has the highest income this year".
                      ?????? Is this making much sense to you?

                      Comment


                      • #12
                        Originally posted by Acandria View Post
                        I will definitely talk to a CA. Just trying to wrap my head around some basic concepts as I have little experience in...life in general I suppose. I understand the depreciation recovery that may incur but i thought being able to allocate shares was one of the 'benefit's compared to other structures?

                        I have one last daft question I need clarification on and i'll stop bothering you!!

                        My parents, mum&dad investors, have a few properties. Dad earns more than mum and they don't have an LTC and all the losses seem to offset my dad's income only. Mum said her accountant 'asked again who has the highest income this year".
                        ?????? Is this making much sense to you?
                        Maybe your dad and mum has a business? where your dad is the primary shareholder and director, and your mom is a non-executive director? Then your dad pays your mum a director's salary? Then the income level is dictated by your mum and dad.

                        Comment


                        • #13
                          Originally posted by Gary Lin View Post
                          Maybe your dad and mum has a business? where your dad is the primary shareholder and director, and your mom is a non-executive director? Then your dad pays your mum a director's salary? Then the income level is dictated by your mum and dad.

                          My dad does currently have a business but only this year! But I see what you're saying.


                          Many thanks Gary!

                          Comment


                          • #14
                            Originally posted by Acandria View Post
                            Dad earns more than mum and they don't have an LTC and all the losses seem to offset my dad's income only. Mum said her accountant 'asked again who has the highest income this year".
                            ?????? Is this making much sense to you?
                            Hi Acandria,

                            Get proper advice, as some of the information on here will be confusing you and possibly wrong. For example if you are a new investor you won't have building depreciation (stopped 1/4/11), and therefore won't have recovery issues as you generally don't recovery depreciation on chattel depreciation.

                            You statement above sounds fishy and not quite right. But you probably haven't got all the information. Some possibilities
                            - owned in your Dad's personal name, therefore all profit or loss would go to him. Fine while making losses, but when makes a profit will also go to him!
                            - partnership - could be dodgy and accountant trying to make most tax effective when legally can't. Or could be a legal partnership agreement (not that common ) where your Dad owns 99%, and therefore gets 99% of profit or loss
                            - The accountant asking who has the highest income part, sounds very weird. With sole trader or partnership, you have no option, ie the loss allocations are fixed based on the ownership. So you/accountant can't change who the losses goes to.

                            Ross
                            Book a free chat here
                            Ross Barnett - Property Accountant

                            Comment


                            • #15
                              Originally posted by Acandria View Post
                              My parents, mum&dad investors, have a few properties. Dad earns more than mum and they don't have an LTC and all the losses seem to offset my dad's income only. Mum said her accountant 'asked again who has the highest income this year".
                              ?????? Is this making much sense to you?
                              It could be that their accountant is wrong!
                              Unless they get audited IRD won't test it.
                              Many people think because they have gotten away with something for a while then it must be legit.
                              If both parents own the property in common and both are 'ordinary' tax payers then they share the profits and loss 50/50 - they can't just decide who takes the profit.

                              Comment

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