Changing an Owner Occupier status to Rental whilst in a trust

[Brave]

HI there.....
I have a situation where I purchased my house to live in it and placed it into a trust. I now 2 years later I wish to rent the house out and so I understand that the house needs to be sold to another entity. The benefit to changing the entity is since im buying for the purposed of rental, I can therefore offset income and expenses ....pass the negative loss position against my personal income.
I believe that if I did not sell the house but kept it unchanged then my trust must pay tax on the income being earned and I cannot offset the expenses...."because the house was originally purchased with the intention to live in it".

Now I already have a LTC because I have a business, that files a tax return on a modest income.
SO am I right, I have to sell the dwelling ?
I need to know its current value ?, so can I use the new Govt Valuation ok....couple of months old.
I have lending and so my bank has to consent to borrower/owner changing ?
Should I use my current LTC ?
Does an Accountant act for me here ?, obviously returns will now be filed on an on-going basis by the accountant as the dwelling will be earning an income

Hey thanks in advance for any feedback here......ive been racking my brain for a while trying to get my head around it all........cheers

[iwik]

An accountant in here no doubt give you the oil when he stops picking up his beans for the day.

Won't it have to be in your name to claim against your personal income ?
With the trust tax rate to my knowledge being 33% it could work against you keeping it in
a trust.
At a guess your accountant could tie the property into the LTC ?

[spaceman]

.....
I believe that if I did not sell the house but kept it unchanged then my trust must pay tax on the income being earned and I cannot offset the expenses...."because the house was originally purchased with the intention to live in it".

...........cheers

This isn't true.

If it was i could buy a rental...claim all expenses ....then move into it to live and still claim all the expenses....after all it was originally purchased with the intention to rent out.

what matters is the current use....NOT the original intent at purchase.........no matter what Xris thinks

Cheers
Spaceman

[Anthonyacat]

Hi Brave

As Spaceman said, you will be able to claim the expenses of generating rent (rates, insurance, sometimes mortgage interest [see below], repairs on the property, etc) as expenses, regardless of the property's ownership structure.

For a trust, the net income (rent minus expenses) will be taxed at 33%, unless it is distributed to beneficiaries of the trust, in which case it will be taxed at their personal marginal tax rate. If the expenses exceed the income (ie, property makes a loss) the loss is 'trapped' in the trust, as you aren't allowed to distribute losses. If the trust has other income, the rental loss can offset this.

The interest costs on any borrowings to initially purchase the property would also be deductible, but if you've ever taken a 'top-up loan' to take a holiday, buy a car, etc, this wouldn't be deductible. Similarly if you've had a revolving credit facility and regularly repaid/redrawn money, this muddies the waters significantly.

A big benefit of changing ownership structure is to maximise interest claim; a new company or trust would borrow (say) 80% of the cost of the property, and this would all be deductible. The advantage here is that 80% of the current value may be significantly higher than the original purchase price from years ago, increasing deductions.

However, you have to be careful that you aren't just transferring it for the purposes of tax claims, as the IRD sees this as tax avoidance. There must be a legitimate business purpose for the transfer of ownership, and the tax advantages are merely incidental.

See a Chartered Accountant for further detailed advice, but be prepared to pay for it. Good advice is worth the money. I can recommend a couple good ones (myself included, of course), and Rosco, who will probably chime in on this thread in the next couple days, is excellent.

[richard56]

Hi
So what would a "legitimate business purpose for the transfer of ownership" be ?
In the scenario that you want to sell your PPOR house to the trust then rent it out.
Richard

[Anthonyacat]

Would depend entirely on your circumstances, and that would be the sort of thing an accountant would charge to investigate.

But a general reason that may or may not legitimately apply in your case? Keeping a personal, non-income earning trust, as exactly that might be sufficient. If the new trust had different trustees or beneficiaries this would provide stronger evidence (because its quite possible that the beneficiaries of a rental property would be different to the beneficiaries of a trust with private home-type assets in it).

I hope that helps?