Selling our freehold personal home to LTC for rental use and gearing up

[Andrew_R]

Hi All,

Wife and I are thinking about buying a new personal home, and retaining our existing personal home but changing its use to a rental - we own it freehold. We are thinking of establishing a jointly owned LTC which would buy our existing home off us, and would use new mortgage debt raised by the LTC to do that.

in our hands as shareholders, we would use the proceeds of the sale to buy the new personal home, which would be owned directly by us.

Is there any risk that the LTC would not get a tax deduction on interest expense if we did this. i.e. - could the establishment of the LTC, the sale from us to it, and the gearing up of the currently freehold property be viewed in substance as avoiding tax?

Keen on your thoughts.

Cheers, Andrew
Wellington

[klauster]

LTC, Trust, Company are entities to structure businesses and asset ownerships. Profits and losses are ring fenced and for distributions to shareholders and beneficiaries apply taxation rules.

A private seller has income, the buyer has costs (maybe covered by a loan) – two different transactions, business activities and tax duties are entity related.

[Anthonyacat]

Hi Andrew

In standard circumstances, which it sounds like yours are, this is a completely legitimate and allowed transaction. The IRD have explicitly said so in at least one release, though I don't have the details on me at this stage.

I'm not entirely sure why the IRD don't see this as tax avoidance, but they're very clear that they don't.

If the property was already a rental it muddies the water a little. Same goes if you try to do the sell and re-leverage exercise again with the same property. In both cases it can still be legitimate but requires a bit more work, and in some cases won't be possible.

[Rosco]

Hi Andrew,

Is your personal house a good rental?

I'll put it another way. If you didn't own the property, and you were looking to buy a rental, would you buy your existing personal home as a rental?
- is the cashflow good with 100% debt?
- is there potential to add value, buy subdividing, adding a minor dwelling, adding a bedroom or similar?

If cashflow is bad, and no added value potential, why are you looking to keep it as a rental?

This blog might help too https://cswaikato.co.nz/index.php/la...n-auckland/183

[spaceman]

You should buy the new property in a company or trust as well....PPOR has no tax advantages.

Living in a home that you don't own does has tax advantages...… a maxim of the rich is supposedly...."own nothing control everything"

Cheers
Spaceman