Look Through Company

[Adrian1]

I am wanting to move out of my current home which I own into a larger home, which I will also buy. I plan to use my current smaller home as a rental.
My accountant says to sign up for a look through company.
The bank manager says that it is not necessary.
The new house will be mostly paid off, with the loan on the rental.
Any advice on LTC's would be greatly appreciated.

[wodger]

I am wanting to move out of my current home which I own into a larger home, which I will also buy. I plan to use my current smaller home as a rental.
My accountant says to sign up for a look through company.
The bank manager says that it is not necessary.
The new house will be mostly paid off, with the loan on the rental.
Any advice on LTC's would be greatly appreciated.

It probably isn't *necessary* but I would take my accountants advice over my bank's.

[Rosco]

Hi Adrian,

Say your current house is worth $500k with no loan (House A)

You then buy a new personal house for $600k with a $600k loan (House B).

House A becomes a rental - You take your bankers advice and do nothing - NO interest is deductible.

The $600k loan was used to buy your new personal house, so isn't used to buy the rental so isn't deductible.


So generally a restructure is done to improve this situation. I don't know your situation so can't say whether an LTC is right or not, but this is very common as part of a restructure.


BUT, to go back a 2 steps - Is your House A a good rental?

- What is the Gross yield?
- With a 100% mortgage what is the cash profit or loss per year?
- can you add a minor dwelling or another twist to improve?
- If there is a cash loss, what is your plan over say 5 years to change this to a profit?
- If there is a cash loss, can you afford this?
- What is your risk reduction plan? ie interest rates go up, you loss a job, have an accident or get cancer?
- If you are really speculating this property will jump up in value, just make sure you understand your risks around this and try to reduce them where possible.

Second question - will you be holding long term? If not, and you restructure House A, then any gains might be caught under new 2 year brightline test


Overall get advice from a chartered accountant who specialises in property, don't get tax advice from a banker!

Ross

[Adrian1]

Thanks Wodger,

as this new house I will be purchasing will be one I intend on keeping for a number of years, I don't want to make any uneducated decisions.
I would always go with the advice from, say, my own personal accountant, who is looking after my best interests as opposed to a bank manager.

[Adrian1]

Hi Adrian,

Say your current house is worth $500k with no loan (House A)

You then buy a new personal house for $600k with a $600k loan (House B).

House A becomes a rental - You take your bankers advice and do nothing - NO interest is deductible.

The $600k loan was used to buy your new personal house, so isn't used to buy the rental so isn't deductible.


So generally a restructure is done to improve this situation. I don't know your situation so can't say whether an LTC is right or not, but this is very common as part of a restructure.


BUT, to go back a 2 steps - Is your House A a good rental?

- What is the Gross yield?
- With a 100% mortgage what is the cash profit or loss per year?
- can you add a minor dwelling or another twist to improve?
- If there is a cash loss, what is your plan over say 5 years to change this to a profit?
- If there is a cash loss, can you afford this?
- What is your risk reduction plan? ie interest rates go up, you loss a job, have an accident or get cancer?
- If you are really speculating this property will jump up in value, just make sure you understand your risks around this and try to reduce them where possible.

Second question - will you be holding long term? If not, and you restructure House A, then any gains might be caught under new 2 year brightline test


Overall get advice from a chartered accountant who specialises in property, don't get tax advice from a banker!

Ross

Thanks Ross,

I intend on using a buy and hold strategy from this point on.
I see the folly in my personal position of constantly selling and then buying bigger in the same market.
House A has roughly $300k equity, $400 mortgage.
House B I intend to but in the Auckland area for $900.
Interest only loan is what I am going to go for.
I will have the majority of the loan on house A to maximise my tax advantages.
As I am looking long term, I hope in 2 years to purchase a small rental.
My ability to pay the mortgage is fine, as I am taking a safe approach and not over stretchiing with my LVR.

Thanks, Adrian

[sidinz]

Thanks Ross,

I will have the majority of the loan on house A to maximise my tax advantages.

Then as per Ross's advice, you will need to restructure by selling it to another entity (such as an LTC).

[Anthonyacat]

Iit doesn't actually matter where the loan is secured. It's what the loan was borrowed for that matters.

You should restructure your property. Whether it is an LTC, Trust, or regular company will depend on your situation.

[wodger]

Iit doesn't actually matter where the loan is secured. It's what the loan was borrowed for that matters.

This is interesting. I was aware of this before now. People always say you can just reduce your personal mortgage by restructuring and transferring it to your rentals, which may have become cashflow positive since they were purchased, so as to increase your deductible interest cost and generate a claimable loss again. But how realistic is this in practice?

[WINZ]

Hi Adrian,

Say your current house is worth $500k with no loan (House A)

You then buy a new personal house for $600k with a $600k loan (House B).

House A becomes a rental - You take your bankers advice and do nothing - NO interest is deductible.

The $600k loan was used to buy your new personal house, so isn't used to buy the rental so isn't deductible.


So generally a restructure is done to improve this situation. I don't know your situation so can't say whether an LTC is right or not, but this is very common as part of a restructure.


BUT, to go back a 2 steps - Is your House A a good rental?

- What is the Gross yield?
- With a 100% mortgage what is the cash profit or loss per year?
- can you add a minor dwelling or another twist to improve?
- If there is a cash loss, what is your plan over say 5 years to change this to a profit?
- If there is a cash loss, can you afford this?
- What is your risk reduction plan? ie interest rates go up, you loss a job, have an accident or get cancer?
- If you are really speculating this property will jump up in value, just make sure you understand your risks around this and try to reduce them where possible.

Second question - will you be holding long term? If not, and you restructure House A, then any gains might be caught under new 2 year brightline test


Overall get advice from a chartered accountant who specialises in property, don't get tax advice from a banker!

Ross

When buying a rental under an LTC (or at least putting the housing debt there), does the LTC need to be registered for GST? Is there any advantage / disadvantage for this, particularly with respect to adding improvements to the home (which may or may not be sold later)?

[sidinz]

It works fine in practice. By selling your old house to a new entity (let's say an LTC) the LTC has to raise a loan to purchase your house. Therefore the purpose of the loan is for the LTC to purchase an income-generating asset, so totally deductible. You also get to take the equity in that house to your new home and minimise the mortgage over it. Larger borrowing is legitimately on the rental.

In contrast, if you just shuffle the money, it doesn't change the fact that the new loan was borrowed to purchase your new home and is not deductible. In addition, the equity is stuck in your old house/now rental. Thus borrowing on your new home is maximised and that on your rental is minimised.

[Wayne]

When buying a rental under an LTC (or at least putting the housing debt there), does the LTC need to be registered for GST? Is there any advantage / disadvantage for this, particularly with respect to adding improvements to the home (which may or may not be sold later)?

Been covered on the thread somewhere but
NO
If it a long term hold for rental then it isn't covered by GST.
You can't charge GST on the residential rental so you can't claim a GST deduction for anything that you spend.

If you are buying for trade then different - talk to your accountant.
If you don't have one - get one!