LTC Investment Strategy

[wilby08]

Hi

Here is my situation, where to go from here?

My wife and I set up an LAQC (now LTC) 5 years ago and we purchased our first investment property in Dunedin for $210000

Since then we have paid off around $40000
The remainder is split 50/50 in two floating accounts paying P&I
Our rental income is $240 pw after property manager %

We are currently living in Auckland in someone elses rental. It may seem backwards but at the time we were living in a Defence Force house paying bugger all in rent.

We are over topping up the mortgage and are wanting to focus on saving for our own house. We have about 120K sitting in savings at the moment and realise we are not making much on this money.

Should we look at paying a large sum off the rental so it looks after itself or using an offset mortage/revolving credit?

If we were to pay a large amount off the rental we would need to be able to access this at a later stage so we could build our own house.

I have been under the impression if we were to pay $100K off the rental we would only be paying interest on the remaining 70K therefore the rent will take care of the repayments and any extra could be used to pay off the principal.
In doing this we would be paying off more principal than we are now and also saving the 7 grand we usually pay a year in repayments which could also be used to decrease the principal.

If this was the case is the LTC considered to still be making a loss?
If not what is the tax rate we would be paying on any rental income?

Is it worthwhile having a LTC for one rental property after all we only received around $1200 in our tax return this year.

Keeping in mind we would like to build our own house in about 12 months.

I hope I have supplied enough info and would appreciate any advice

Thanks

[Rosco]

Hi,

I would need more information to give you a full answer. But here is some basics.

1) if LTC makes a profit, then profit is allocated to shareholders in proportion to their shareholding. So tax will depend on who owns the shares and what your tax rates are. Ie high earner over $70,000 would be paying 33% tax.

2) If you put in a large sum to the LTC, you just need to make sure that when you want to take it out, the interest incurred on the loan is still deductible. In general it will be, as the loan is taken out to repay your shareholders current account. But before putting the money in you need to calculate and understand your owners basis within the LTC. If you have no owners basis, then you can't claim losses!

If you have filled your 2012 tax return, then you should have your owners basis at that date.

3) the right entity can vary widely based on your situation. From what you have said there would appear nothing wrong with an LTC, and it should in fact give you better flexibility.
You could look at a Trust for asset protection, but there would be costs and other factors to consider. Or a Trust owning the LTC shares, but if you take your money back out of the LTC, this could result in losses being unuseable in the Trust.

Ross