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Hi all,
I’d appreciate a bit of advice from the knowledgeable people here about my situation.
My mother-in-law from the UK is wanting to move to NZ to make a fresh start and help look after her grandchild (my child). She will be selling her UK house and expects to net around $120k NZD cash from it, after outstanding mortgage and other costs etc are cleared.
She wants to buy a property near us in Auckland to live in but since will have very low income (just her pension and whatever pittance we pay her for childcare
), no credit history here, and is 60 years old, the chances of her even qualifying for a mortgage over here are basically zero.
I’m a UK qualified accountant, (but don’t practice over here meaning my knowledge of NZ tax is shaky) but I’ve been looking into the best way of structuring things and it seems to me that we can both make substantial tax savings by doing the following:
1) Mother-in-law gifts us (my wife and I) the $120k which we use to pay off our personal mortgage.
2) We then use the accumulated equity in our house (which will be around $300k at that point) as security to purchase a second property as an investment with a mortgage around $300k, which we then rent to her for peppercorn rent (say, $1 per week). In terms of actual cash we then work out what her hypothetical rent might be at fair market value, and deduct that from whatever we owe her for childcare and use of her money.
For example, say we would otherwise pay her 5% p.a. on her $120k and $450 p.w. in childcare, that works out to be around $560 p.w. paid to her. Then deduct the market rent of say $300 p.w. so we end up paying her cash, weekly, $260. She would then declare that $260 p.w. as her income for tax purposes (along with her UK pension) So she saves tax that way.
When calculating the income from the rental, and adjusting for the expenses, we would be making a loss, which I could then offset against my top rate tax.
(Would I have to calculate the expenses against the market rent value, or the contract rent of $1.00 (one dollar) p.w? Obviously ‘loss’ would be greater if we could claim against the $1 but I suspect that may not be legal)
Also, if I am only planning to offset the loss against my income, do I need to setup an LAQC or can I just do it as personal ownership and save the hassle?
I’d appreciate some feedback if this sort of thing is possible, legal, illegal, iffy, or whatever. Obviously I will seek to get advice from a NZ qualified accountant before I do anything.
Basically I've read that the IRD frown upon selling your own personal house to your own LAQC and renting it back to yourself, but it is not clear to me how they view doing a functionally similar thing with relatives where the ownership is clearly a different person.
I’d appreciate a bit of advice from the knowledgeable people here about my situation.
My mother-in-law from the UK is wanting to move to NZ to make a fresh start and help look after her grandchild (my child). She will be selling her UK house and expects to net around $120k NZD cash from it, after outstanding mortgage and other costs etc are cleared.
She wants to buy a property near us in Auckland to live in but since will have very low income (just her pension and whatever pittance we pay her for childcare
), no credit history here, and is 60 years old, the chances of her even qualifying for a mortgage over here are basically zero.I’m a UK qualified accountant, (but don’t practice over here meaning my knowledge of NZ tax is shaky) but I’ve been looking into the best way of structuring things and it seems to me that we can both make substantial tax savings by doing the following:
1) Mother-in-law gifts us (my wife and I) the $120k which we use to pay off our personal mortgage.
2) We then use the accumulated equity in our house (which will be around $300k at that point) as security to purchase a second property as an investment with a mortgage around $300k, which we then rent to her for peppercorn rent (say, $1 per week). In terms of actual cash we then work out what her hypothetical rent might be at fair market value, and deduct that from whatever we owe her for childcare and use of her money.
For example, say we would otherwise pay her 5% p.a. on her $120k and $450 p.w. in childcare, that works out to be around $560 p.w. paid to her. Then deduct the market rent of say $300 p.w. so we end up paying her cash, weekly, $260. She would then declare that $260 p.w. as her income for tax purposes (along with her UK pension) So she saves tax that way.
When calculating the income from the rental, and adjusting for the expenses, we would be making a loss, which I could then offset against my top rate tax.
(Would I have to calculate the expenses against the market rent value, or the contract rent of $1.00 (one dollar) p.w? Obviously ‘loss’ would be greater if we could claim against the $1 but I suspect that may not be legal)
Also, if I am only planning to offset the loss against my income, do I need to setup an LAQC or can I just do it as personal ownership and save the hassle?
I’d appreciate some feedback if this sort of thing is possible, legal, illegal, iffy, or whatever. Obviously I will seek to get advice from a NZ qualified accountant before I do anything.
Basically I've read that the IRD frown upon selling your own personal house to your own LAQC and renting it back to yourself, but it is not clear to me how they view doing a functionally similar thing with relatives where the ownership is clearly a different person.
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