Family Trusts, Ring fences and Bright Line rules

[Jellybean]

Hi All
We had a family home that was owned by the family trust for 10 years and then 3 year ago the trust bought a section and built a new family home. The build was messy with the builders going bust and it was stressful. Eventually we moved into house 2 about 18 months ago while the build was still being complete.
At the time it was just easier to rent out House 1 (failed to sell) without moving it to a look through company.

Q1 If we sell House 1 now will the trust need to pay any tax on it since technically the trust owned it for 10 years.i.e. is it subject to bright line rules since it is technically a rental fro the last 18 months?
Q2 If the rent is just covering the mortgage (breaking even) can the trust just continue to hold the property (in the hope of realising the capital gains later)?
Q3. If there are minimal losses (given that there is now ring fences) can I just leave them to stock pile in the trust.

Thank you.

[spaceman]

1 No
2 Yes
3 Not sure, but I think so Yes

Cheers
Spaceman

[Nick G]

Ask your accountant. Getting correct advice will cost you one hour's time and potentially save you thousands.

[Anthonyacat]

As Nick has said, talk to your accountant!

But the short (but not as short as Spaceman's) answers to your questions:

1) Bright Line timeframes refers to purchase dates, nothing to do with when it was a rental. You've owned it more than 5 years, you're clear of Brightline.
2) There is no requirement for the trust (or any other entity) to make a profit on the rental. But be aware that if the trust is just barely covering the mortgage, it is probably making a taxable profit, as the principal payments are not deductible.
3) Yes, losses can stock pile in the trust until property-related profits one day offset them. As the mortgage decreases, this will happen naturally.

[Jellybean]

As Nick has said, talk to your accountant!

But the short (but not as short as Spaceman's) answers to your questions:

1) Bright Line timeframes refers to purchase dates, nothing to do with when it was a rental. You've owned it more than 5 years, you're clear of Brightline.
2) There is no requirement for the trust (or any other entity) to make a profit on the rental. But be aware that if the trust is just barely covering the mortgage, it is probably making a taxable profit, as the principal payments are not deductible.
3) Yes, losses can stock pile in the trust until property-related profits one day offset them. As the mortgage decreases, this will happen naturally.

Thanks Guys - this is in line with what the account said to us but had another lawyer (not ours) told me that once I rented out the house in the trust it would have the bright line test applied and I would have to pay tax on it if I sold within 5 years. Maybe I misunderstood them but that did not make sense to me, so thank you again.

Just to clarify on a different issue am I right in the understanding that bight line and ring fencing does NOT apply to commercial property?

[Anthonyacat]

Correct. Residential only.

[Rosco]

Thanks Guys - this is in line with what the account said to us but had another lawyer (not ours) told me that once I rented out the house in the trust it would have the bright line test applied and I would have to pay tax on it if I sold within 5 years. Maybe I misunderstood them but that did not make sense to me, so thank you again.

Why would you get or take tax advice from a lawyer?

[spaceman]

https://www.google.co.nz/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=2ah UKEwimpMr8n4blAhX573MBHdH6CfQQjRx6BAgBEAQ&url=http s%3A%2F%2Fmemegenerator.net%2Finstance%2F48328526% 2Fnapoleon-dynamite-that-was-a-freakin-sweet-burn&psig=AOvVaw19cYI-EXpIe-lgnktQz8a3&ust=1570403569319242

[Beano]

Why would you get or take tax advice from a lawyer?

It is because tax laws are written by lawyers and interpretation often needs a lawyer.
Eg using Chapman Tripp (Craig Ellife) for tax interpretation.

[Anthonyacat]

It is because tax laws are written by lawyers and interpretation often needs a lawyer.
Eg using Chapman Tripp (Craig Ellife) for tax interpretation.

Weird. I wrote a post, posted it, then went to edit it and it disappeared.

Anyway, it was something like:

Theres a pretty big difference between "a lawyer" and a specialist tax law expert.

Your everyday lawyer probably knows about as much about tax as I do about law - that is to say, enough to sound intelligent around lay-folk, but certainly not enough to charge for my expertise.

Tax specialist lawyers likely know a lot more than most accountants. And would certainly be more up to play on any case law.

[Learning]

Weird. I wrote a post, posted it, then went to edit it and it disappeared.

Don't edit an existing post on your Android phone. It took me a few lost posts to realize this.