Holding a PPOR in a B+H trust.

[SuperDad]

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.

[xris]

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

[Ivanhoe]

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:

http://www.propertytalk.com/forum/showpost.php?p=19274&postcount=81

http://www.propertytalk.com/forum/showpost.php?p=19414&postcount=97

[Dean@Massiveaction]

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.

[JohnL]

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

[MJU]

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.

[CJ]

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.

[spaceman]

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

[SuperDad]

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.

[Dean@Massiveaction]

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.

[spaceman]

Oh no they haven't

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....
.

Below is a press release from the IRD quite clearly stating that you can ....admittedly it is 2 years old so things may have changed ....but I doubt it

Cheers
Spaceman

2004 media releases

Tax avoidance involving LAQCs and the family home
19 July 2004

Inland Revenue has noted with concern that a group of taxpayers are selling their private home to a loss attributing qualifying company (LAQC), and then claiming tax deductions.
Selling your private home to a LAQC in order to claim a tax deduction for what are really private expenses, may be tax avoidance in some cases, says Margaret Cotton, of Inland Revenue.
"Unfortunately, some investment advisors are telling their customers that they can claim a tax deduction by selling their residential property to a loss attributing qualifying company, renting the property back from that company and claiming a tax loss," said Ms Cotton, National Manager of Technical Standards.
"Inland Revenue considers that such arrangements will often be tax avoidance for the purposes of income tax," she said.
Ms Cotton explained that Inland Revenue is currently considering several cases where a LAQC has been used to buy a residential property that the shareholders will rent as their residence. Even where a market rental is paid to the LAQC, a tax loss can still be generated to the advantage of the shareholders.
Where tax avoidance is proven, the taxpayer must pay the tax avoided as well as a penalty of 100% of the tax avoided. Use of money interest will also apply.

http://www.ird.govt.nz/aboutir/media-centre/media-releases/2004/media-release-2004-07-19.html

http://www.cch.co.nz/tax/pssrels/laqc_fam_home.asp

[Dean@Massiveaction]

You're confusing me Lawrence. Your IRD quote confirms exactly what I said?? Don't put your own home in an LAQC and rent it back.

[spaceman]

Oh no it doesn't ...version 2.0

[quote=pooomba;50635]You're confusing me Lawrence. Your IRD quote confirms exactly what I said?? Don't put your own home in an LAQC and rent it back.[/quote]

It say's MAY BE tax avoidance. Not IS tax avoidance, and WILL OFTEN. Not always or is.

I know it takes some reading between the lines but if in may be tax avoidance then it may also not be tax avoidance.

Now you could argue I'm splitting hairs here, but I don't think I am as I think the words used are carefully chosen. There are plenty of cases where the IRD are crystal clear on what is or isn't tax avoidance (also a large grey area this is true) and in this case they clearly leave the option that in certain cases it can be regarded as OK.

Now we can all easily dream up some examples were it would be perfectly reasonable to claim.

Myself for example.

Currently I have no PPOR in NZ, lets say I want to return to NZ and find a permanent palce to live and I decide to live in one of my rentals in the interim and I pay market rents for the duration of my stay while I look for my PPOR..... i think I would have a valid claim especially if the duration of my stay was relatively short .... would I want to push the IRD all they way and defend my position in court ....probably not, I think in this case I would cave before it went as far as a court case. But I would be certainly putting the original claim in (provided my account also agreed it was reasonable of course).

To allow these kind of cases is exactly the reason i think Ms cotton used the words MAY and WILL OFTEN

Cheers
Spaceman

[MJU]

Super Dad,

You can transfer the family home into the trust, occupy it, and not rent it from the trust.

Just be careful that the debt of the trust is clearly funding the rentals the trust may hold so that the interest remains deductable!

[CJ]

Poomba - Disagree with you disagreeing for the reasons Spaceman put. I did note in my post that here was IRD risk but I beleive there are some (not all) situtations where it can be done and if challenged you could defend it (not sure how much it would cost though).

Others have said you can put it in the trust and live in, there is no need to pay rent. That is true but then he is not getting the deduction which he wants to offset profits from another property.

In this case, I would say the risk fo renting from the trust is too high but only from a tax avoidance point of view. With out this anti avoidance provision, it could be done from an accounting, legal and tax perspective.