Assigning a S&P agreement - is this property trading?

[FatBelly]

I want to pose this question to all you seasoned investors out there - in the event that you sign up a property on a conditional agreement, with the intention to assign the agreement to other investors for a fee, does this qualify as 'property trading?'.

I have always thought not as you never actually are buying and selling the property, you are onlmy agreeing the right to buy it (in the form of a contract) and then selling that contract. However I have just had a frustrating discussion with my solicitor who argues black and blue that it is property trading, as the intention of signing a S&P is an intention to buy the property, and it is the original intention that the IRD look at.

Secondly, regardless of whether agreements have 'and/or nominee' after the purchasers name/entity, and if the assigning of the property is formally agreed, signed and binding between an assignor and an assignee, he says that a vendor does not have to accept the assignee as the new purchaser and can equally come back and hold you liable if the assignee defaults on the property after going unconditional as your name is the one on the original S&P??

Is this right??

[graemeh]

I'm not sure of the exact definition of property trading, however for tax purposes you signed the agreement with the intention of selling and making a profit so that profit is taxable (and any loss is deductible), whether you call this property trading or some other term.

He is also right about you still being "on the hook" for an assigned contract. The vendor accepted an offer from you, not the person you assigned it to. You could get around this by having the vendor agree to the assignment and releasing your from liability under the original contract, but you'd have to ask why a vendor would do this. I know I wouldn't unless there was something in it for me.

[Ivanhoe]

When you are selling agreement (contract, option) to buy a property to another person, are you selling OPTION or PROPERTY?
If the assignee defaults - you settle. Or put clause where they will agree to asignment and you will be painted out of picture altogether. I would talk to solicitor about it, in your case - different one!
Go to RM site and get some of their S&P agreements on properties they have there - very good info on how to structure this type of deals!

[Chemill]

You are not settling on the house yourself, so you are not buying the house. You would have to actually buy the house and then sell the house to trade.

You are creating and selling a conditional contract to purchase the house. Therefore trading in contracts.

I am not a professional in this are so I would recommend you go have a talk to an ACCOUNTANT, as this is a tax issue. Unless your solicitor is a tax lawyer with specialist knowledge in property.

my thoughts.

Chemill

[captaincrab]

You are trading, whether its the Contract or the actual House so it is Income and therefore taxable. The only way out of liability in an "onsale" is by Novation or Substitution. Neither of which I doubt a vendor would agree to. Are you taking your "profit" as a separate fee or by selling for a higher price? If , by a higher price, then you have to assign so the margin you are getting flows through your account before the Vendor is paid. As they say, "no reward without risk"

[Chemill]

Whoa.. Have I got the wrong end of the stick or do others?

I took the question to mean "will assigning the contract to others for a fee cause the IRD to view Fatbelly as a property trader and thus tainting Fatbelly's future R.E transactions as property trading."

I guess a good way to ensure tainting does not occur is to set up a limited liability company for your property finding activities.

[JohnL]

I wouldn't have thought assigning properties would taint you as a property trader, but you would need to check with a tax expert.

If it does, then an limited liability company does NOT prevent you from being tainted.

Obviously, if you are ever forced to settle due to a nominee falling over, then you can assign it into a Trading Trust which is carefully set up to prevent tainting. If you don't have one, you should be able to get one set up within a week!!!

John

[FatBelly]

Hi all - thanks for your replies.

Yes Chemill you are on the right track, my issue here is to isolate/avoid the tainting issue, which I know can be done thru a trading trust. I think we all agree that it is trading and that it will be taxable - no problems with this, but my dispute is that I dont class this as 'property trading' as it is trading in contracts, not trading in properties. Although the intention is to buy (thru the S&P agreemnent), if you dont end up buying and selling yourself, how can this be 'property trading?' Isnt this just like trading the option to buy?

Sounds like the safest way is to set up a trading trust asap for anything like this to be safe just in case.

JohnL - Where/who can set this up within a week??

[JohnL]

Garth Melville at Company Solutions. Normally it takes longer as you have to get as far as getting the GST registration, before you assign it to the Trust, but it can be done. If necessary, a few days of penalties for settling late is better than having a dispute with the IRD over eligibility for the GST refund, because you will still be liable to pay GST when you sell.

Get your accountant (who probably isn't a tax expert) to get advise from NSA, who are tax experts, re the tainting and assignments. Like you, I wouldn't have thought it was an issue, but worth checking.

No need to set up a Trust before you have really to.

John

[FatBelly]

I have heard Garth Melville is the guru here, man he must be busy as everyone I talk to seems to recommend him!

If necessary, a few days of penalties for settling late is better than having a dispute with the IRD over eligibility for the GST refund, because you will still be liable to pay GST when you sell.

JohnL - I think you may have misinterpreted what I have been alluding too, as with assigning a property you wouldnt actually be settling on the property. You dont buy and sell it, you assign the contract to someone else to actually buy it.

In this way I have interpreted this to be different from property trading, and also different from norm's of acting as a real estate agent (who gets a fee from the vendor) as the fee generated is obtained from the investor who the property is assigned to. I guess this would constitute being a property finder.

[toby]

If you assign an agreement you are selling a piece of paper the fee for selling the contract is taxable as usuall however you are not a trader unless you purchase the property with the intenion of resale.
The scenario is if you flip before settlement and take a fee for your agreement you're not a trader, if however you double settle or sell after settlement where that was your intenion you are.
So far as if your assignee does not settle, you are liable this is correct unless you do a novation.
A novation is where the vendor agrees to have the new purchaser assume your responsibility.
I have found that it's not a problem assigning though as long as you get cash folding upfront at assigning time, always get some skin! But never give any if at all possible.
I had heard that once you've confirmed on a contract the rules have changed though I have yet to be contested on that by the IRD. (this is New)

[JohnL]

When I was referring to late settling I was referring to the worst case scenario; when you have to settle because your assignment fell over. At that point, I would get the trust set up in a hurry and settle (assume you can get finance).

John

[xris]

Hello FatBelly,

Thank you for your well-written and thought provoking post. There have been some excellent responses so far and I am sure many are still to follow. I cannot therefore really add anything to what has already been mentioned in relation to the tax and tainting issues of assigning contracts.

However, by assigning S&P contracts prior to settlement and receiving a fee for doing this (in other words being a property finder) you are acting as a Real Estate agent. Being a Real Estate agent is not a crime, but if you are an agent you have to do it legally, which the majority of property finders are not doing. They are therefore breaking the law. This fact in itself may be of no less significance to you than whether or not property finders are classed as property traders and whether or not their buy-and-hold properties are being tainted.

I brought this subject up a while ago which lead to healthy and rigorous debate. The thread seems, miraculously, to have disappeared. I have only brought it up again in response to your remarks and questions. I could comment further if you would like me too.

xris

[NZGEMS]

Hi Fatbelly,
You have had some good advise here, you could come unstuck if someone refuses to settle, in which case it may not just be a case of penalty interest, they can sue you for extra costs. So you do need firstly to have a assignment form that makes it fairly clear it is their problem, (Which I did but at the end of the day when you have someone refuse to settle it is a sticky one) Of course you could do what Toby suggested and do a novation. That is if they agree, from my experiance I think it would be a low number who agree to that as many when they realize what you are doing go off the idea.
If you are getting good deals and have reinvested the cash you have made you may be in a position to settle on the odd one too of course.
You wont be tainted as a property trader unless you settle and resell as you have had explained. and you obviously are aware you will have to pay tax on the fees and possibly gst too if you make over $40k in a year.

If you do plan down the track to trade houses it would be a good idea to get yourself set up anyway, you can still apply for gst later even though it is ment to be a rule you are set up first, what are they going to do refuse your refund? I dont think so they want their piece of the pie. still if you have time it is best to apply anyway you will probably have to write a letter in to start with explaining what you do. why are you worried about being tainted a trader? all it means is you pay tax as you do in a job but at least in this game your costs come off first so you pay tax on after tax $ not pretax $ as you do working in a job.
Good luck,
Robyn

[toby]

I should ad that I've personally never used a novation (though could) and agree with Robyn and that is why I don't only assignments and that my experience is that if your trying to get an inexperienced purchaser to even do an assignment they can get funny, having said that it can and is done and if I can ANYBODY can.
I personally don't tell people I don't own the house unless they ask, I tell my lawyer to double settle and when their Lawyer contacts mine questioning the title he knows the drill.
First home buyers and the like don't understand the concept, flipping to investors is a piece of cake.
Remember get some skin though.