2016 property trading structures

[donthatetheplayer]

What structures are people who are doing buy and hold as well as trading using today?

Hopefully this thread can outline different structures people use today. A lot of the info in previous posts is now outdated.

[PTILoveYou]

I thought B&H can no longer setup trading trusts to avoid tainting anymore...

Waiting for Ross/Ivan for their expert opinions.

[Rosco]

I would always suggest getting expert advice as this area is quite complicated. Plus getting advice around GST for trading, as it is easy to make some big mistakes. As with any structures, everyone is a little different, so there are different outcomes for people with different situations.

Some general info
- Association rules changed a number of years ago. Now it is quite difficult to keep your holding unrelated to your trading. There are some cases where you can legitimately do this and do it in quite a simple manner, but there are others where a loop hole has deliberately been found and most likely IRD would consider this to be tax avoidance.

- So it is important to understand tainting. What is tainted and also equally what is not tainted. In general, long term hold rentals held before trading will not be tainted, long term hold rental purchased after trading has ceased also won't be tainted. But long term hold rentals purchased while trading will be tainted and the gains taxable if sold within 10 years.

- If you buy a property with the intention of selling for a profit, any gains are always taxable. So 12 years later, you sell it, the gains will still be taxable.

- Trusts were used a lot in the past to avoid association rules. As these rules have changed, you can often simplify the structure used.

- You might still want a Trust to ultimately own the long term holds to protect these assets, and to derive the trading profits, but might not need multiple trusts to achieve this

Ross

[PTILoveYou]

But long term hold rentals purchased while trading will be tainted and the gains taxable if sold within 10 years.
Ross

Nice to know! Thanks Ross!

[artemis]

You could start with Matthew Gilligan's Tax Structures 101.

[Connor]

I would always suggest getting expert advice as this area is quite complicated. Plus getting advice around GST for trading, as it is easy to make some big mistakes. As with any structures, everyone is a little different, so there are different outcomes for people with different situations.

Some general info
- Association rules changed a number of years ago. Now it is quite difficult to keep your holding unrelated to your trading. There are some cases where you can legitimately do this and do it in quite a simple manner, but there are others where a loop hole has deliberately been found and most likely IRD would consider this to be tax avoidance.

- So it is important to understand tainting. What is tainted and also equally what is not tainted. In general, long term hold rentals held before trading will not be tainted, long term hold rental purchased after trading has ceased also won't be tainted. But long term hold rentals purchased while trading will be tainted and the gains taxable if sold within 10 years.

- If you buy a property with the intention of selling for a profit, any gains are always taxable. So 12 years later, you sell it, the gains will still be taxable.

- Trusts were used a lot in the past to avoid association rules. As these rules have changed, you can often simplify the structure used.

- You might still want a Trust to ultimately own the long term holds to protect these assets, and to derive the trading profits, but might not need multiple trusts to achieve this

Ross

Ross, your post is always so clear and concise. I just love them.

I have a few questions:

1. How do the IRD regnonise someone as havOMG ceased trading? If they stop for 2years, and then find themselves wanting to sell one for cashflow (although the intention when bought was to hold indefinitely), is that still considered as trading?

2. I already bought a property in a LTC for development (claimed GST, the whole she-bang), is there any benefit to creating another company/trust if I want to buy another property as a long-term buy-and-hold?

Thanks.

[Anthonyacat]

Ross, your post is always so clear and concise. I just love them.

I have a few questions:

1. How do the IRD regnonise someone as havOMG ceased trading? If they stop for 2years, and then find themselves wanting to sell one for cashflow (although the intention when bought was to hold indefinitely), is that still considered as trading?

2. I already bought a property in a LTC for development (claimed GST, the whole she-bang), is there any benefit to creating another company/trust if I want to buy another property as a long-term buy-and-hold?

Thanks.

The IRD weigh evidence to determine whether you've finished trading. It can be a point of contention, but sometimes is very simple. An obvious change in your behaviour is a good point in your favour, as is telling your accountant you have ceased trading (and then actually ceased trading).

If you have a buy-and-hold portfolio prior to trading, then do some trading for a while, then stop trading, and two years later have to sell a property from your old buy-and-hold portfolio, you'll be fine, that is not trading. If you found a couple properties while trading that you felt you'd like to hold forever and so buy them, and then stop trading, those hold-forever rentals are 'tainted' for ten years, and you have to pay tax on the profits on sale. If you waited ten years, the tainting would go away.

But please be VERY clear the above only applies to properties purchased with the intention to hold forever. If you own a property purchased for trade, but then after purchase something happens that makes you decide to keep it for a while (say, the market crashes, or your marriage breaks up), the profits on sale are taxable when it is sold no matter how long you wait.


As for your second question, that'll depend on all sorts of other parts of your situation. It will not always be required to set up another entity, but it can often be useful.

[Connor]

Thanks Anthony. I think I have a better understaning now.

[Rosco]

Ross, your post is always so clear and concise. I just love them.

I have a few questions:

1. How do the IRD regnonise someone as havOMG ceased trading? If they stop for 2years, and then find themselves wanting to sell one for cashflow (although the intention when bought was to hold indefinitely), is that still considered as trading?

2. I already bought a property in a LTC for development (claimed GST, the whole she-bang), is there any benefit to creating another company/trust if I want to buy another property as a long-term buy-and-hold?

Thanks.

Hi Connor,

Generally you would trade through a Company or Trust. So would have a Company or Trust minute to document when the Trust/Company stops trading. Also you would want the entity to have actually stopped any trading activity, and ideally never to restart.

As I have mentioned lots, everyone is different, so often structures can be quite different. It all depends on your personal circumstances. But generally you would always have seperate entities for trading and holding, as there are GST and tax consequences!

Ross

[BlueSky]

Nice to know! Thanks Ross!

Not necessarily- its all depends on your intention!. One reason could be you are selling up to get an better investment?

[Rosco]

Not necessarily- its all depends on your intention!. One reason could be you are selling up to get an better investment?

There is no 'not necessarily'

If you are tainted (ie trading properties) and purchase a long term hold rental . If this long term hold rental is sold within 10 years, then the gains are taxable. Doesn't matter what your intention arguments are, it is taxable either way. So if you sold this long term hold property after say 7 years to get a better investment, gains still taxable!

Ross

[BlueSky]

No not trader at all just B&H. Simply selling one in your long term (with whatever issues) to get another IP. Surely this is ok if you are not a trader so no tainting.

[Damap]

That will come down to IRD's interpretation if you are ever audited. Ensure your intention at acquisition is clearly stated and minuted. When you sell B and H a similar burden of proof of why it is being sold should be minuted and on file.

[Rosco]

No not trader at all just B&H. Simply selling one in your long term (with whatever issues) to get another IP. Surely this is ok if you are not a trader so no tainting.

The thread is 2016 Property Trading Structures, (so I'm going to keep completely away from non trading and long term hold). So all the discussion has been around trading or trading and holding. The questions and subsequent answers are related to trading structures, or people who are trading and therefore most likely tainted.

Your long term hold query is a complete different topic.

Ross

[Anthonyacat]

Your long term hold query is a complete different topic.

You tell 'em, Ross!