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  1. #1
    Join Date
    Apr 2006
    Posts
    4,018

    Default Holding a PPOR in a B+H trust.

    Hi all,

    Do any of you out there have your PPOR in a buy-and-hold trust (as opposed to a family trust)? If so, are you renting the property from the trust at market rent, and claiming all allowable expenses?

    I've searched high and low on this forum, and can't find any info on this. There is plenty on family trusts, and plenty on the danger of renting one's own PPOR from a LAQC.

    I want to find a way of protecting our family home - a trust is the obvious way to go. The thing is, we already have a B+H trust with an income-producing asset. What's the harm of popping our PPOR in that trust, rather than starting a new trust? (I can see that creditors could come after the assets of the B+H trust as a whole, so it might be exposing our home to more risk than if it were in its own trust.)

    All thoughts/experiences/comments welcome.

    Paul.

  2. #2
    Join Date
    Nov 2005
    Posts
    3,286

    Default

    Hello Paul,

    I believe your conclusion is about right. Without going into any detail, as I would much rather defer to the tax people here, I believe it comes down to a question of additional protection, through further isolating your home from any form of business activity. I also believe a straightforward answer may not be possible because it will depend on each individual situation.

    I believe the reasons given for not renting your own home from an LAQC would be just the same as renting from a trust - in other words, it can be done but you have to be careful and in most cases should be avoideed.

    xris

  3. #3
    Join Date
    Jul 2005
    Posts
    1,156

    Default

    Hi Paul!
    You'd better talk to Garth about it.
    My limited understanding is:
    renting the property from the trust at market rent, and claiming all allowable expenses?
    don't do it, very grey area. You'd better live in it and pay expenses (your accountant or solicitor will have to do a bit of paperwork, don't remember the name of the document you'll have to sign, sorry)
    There is plenty on family trusts, and plenty on the danger of renting one's own PPOR from a LAQC.
    Basically it's all the same, entity does not matter I think.
    I want to find a way of protecting our family home - a trust is the obvious way to go. The thing is, we already have a B+H trust with an income-producing asset. What's the harm of popping our PPOR in that trust, rather than starting a new trust?
    there's two more advantages in trusts: distribution of income and taxation and also capturing CG. My understanding is: you set-up a "wealth" trust (forget about "family" trust - it's not a good name) and it holds you assets and ALSO you B&H and Trading trusts distribute profits to this trust so it can repay that PPOR and more importantly - start kending these other trusts capital! Also You need to talk to Garth re tri-trust structure and taxation advantages of it - provided your strategies will go beyond boarding houses and will include trading and maybe negative-geared, high CG properties too.
    Please refer to these two posts:
    https://www.propertytalk.com/forum/sh...4&postcount=81
    https://www.propertytalk.com/forum/sh...4&postcount=97
    Don't argue with idiots, they'll drag you down to their level and beat you with experience.

  4. #4
    Join Date
    Jun 2005
    Location
    auckland New Zealand
    Posts
    5,236

    Default

    Hi Paul. Concur with Xris. My understanding is you probably could do it but it is to be avoided. I have had similar conversations with my accountant and structure specialists and they all recommend against it. You leave yourself open to accusations from IRD.

  5. #5
    Join Date
    Feb 2004
    Location
    North Waikato
    Posts
    651

    Default

    I think its OK to have your PPOR in the same trust as your B&H. Just that slight caution about risk, if your B&Hs go wrong. Obviously an additional trust is better, if you intend to have a significant B&H portfolio.

    But if you are stopping after two or three, it is a balance between the extra accounting costs verses the additional risks. But check with Garth.

    John

  6. #6
    Join Date
    Mar 2004
    Location
    Wellington
    Posts
    140

    Default

    You can go either way on this - cost, administration and comfort are factors.

    If you haev 100% equity in the family home, or can arrange to get there, can put it in a separate trust, with different trustees, and can finance the balance of your IP & business debt without putting the family home at riskto your bank.... DO SO.

    I know of many people who have gone both ways on this, and the few who have had a serious business meltdown are delighted that they split the freehold family home off to one side in a separate trust. The Uber wealthy also stick a few dollars in teh same trust to ive off, just in case business and investments go to pieces

    Nobody planned for a serious business failure - leastways no-one I know.


    If you are beholden to the bank on the family home, then it doesn't make much difference - read the GRA paper on the two bank financing and work your way towards the finanicial independance that makes a separate trust meaningful.

  7. #7
    Join Date
    Oct 2003
    Posts
    3,578

    Default

    You can put the PPOR in a trust (all other names are irrelevant other than letting you know why you created it) just as you could put it into an LAQC.

    You could rent it from the Trust the same you could rent it from the LAQC. The same IRD risk would apply.

    So if you want to do it, just keep the expenses and income separate and dont treat the PPOR portion as deuctible (this is also the same as an LAQC).

    Note that the entity is irrelevant (the above applies to individual ownership aswell). Just the benefits that ench entity gives determines if you use them.

  8. #8
    Join Date
    Feb 2004
    Location
    Wellington
    Posts
    2,776

    Default asset protection

    Purely from an asset protection point of view I would suggest a completely seperate trust for the family home ....if it is the one you intend to stay in "untill the day you die" ....if it's more of a stepping stone home on your way (hopefully) to bigger and better things then I don't think it's as important.

    I know that under family law if you place your PPOR in a trust it can be attacked if a judge decides that the reason it was placed in the trust was to prevent your partner having her/his share of the matrimonial proerty in the event of a breakup. I assume ther is probably also some provision along the line of ....if a judge decides that that only reason a ppor was placed in a trust was to defeat creditors then also the trust would be able to be attacked.

    So a trust may not protect your family home in the way you expect it to.

    Renting the home back from the trust can be done, but you aren't allowed to enter into such arrangements for the sole reason of avoiding paying tax.... you need to be real carefull on this one and many people decide it's not woth the risk.

    good luck

    cheers
    spaceman
    Delightfully in need of some Tender Loving Care
    Blessed are those who can give without remembering and take without forgetting
    Some things are not as they seem, nor are they otherwise

  9. #9
    Join Date
    Apr 2006
    Posts
    4,018

    Default

    Hi all,

    Thanks for your replies.

    I've been thinking a bit more about this, and have received advice from my accountant. One things seems clear: you're on thin ice if you rent your PPOR from a trust and claim expenses.

    I've had a good look at the avoidance provisions, including the commentary on those provisions in the Staples Tax Guide (2004). There seems to be case law that supports being able to transfer an asset into a trust and claiming expenses while continuing to use that asset. But at the end of the day it comes down to whether the Commissioner for Inland Revenue determines that the tax avoidance was not incedental, but was the sole or principle purpose of the arrangement.

    My thinking was that if we put our house into a B+H trust, then we would enjoy the advantage of asset protection without the cost associated with setting up a second trust. We would also get to transfer it now, at a lower value than it will be when we finish renovating. One of the effects of doing this would be that, if we rented the property from the trust and claimed expenses, that particular property would run at a loss. This loss could be offset against the profit generated by another property in the trust. This would be incedental to the main goal of asset protection.

    But even if this is technically legit, I find it hard to imagine how I could prove that the tax implications were merely incedental, rather that the sole or primary purpose of the arrangement.

    Paul.
    Last edited by SuperDad; 21-09-2006 at 10:12 PM. Reason: Added reference

  10. #10
    Join Date
    Jun 2005
    Location
    auckland New Zealand
    Posts
    5,236

    Default

    You could rent it from the Trust the same you could rent it from the LAQC. The same IRD risk would apply.
    I think this is quite incorrect. You cannot rent a PPOR from your LAQC and claim tax benefits. IRD have clearly stated this is not on.
    There is no need to rent your PPOR from a trust. You can just live in it. The tax implications are totally different in each case.


 

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