Header Ad Module

**fudosan** · 22-01-2005, 02:15 PM

I think it comes down to the basic idea that once you have more positive cashflow that you really need, you can buy negative cashflow properties in top location with the "hope" for high capital growth.

My understanding is that to avoid "tainting" (property trading which attacts tax and GST, mixed with property investment who does not) you set up two trusts, one for property trading and one for property investment. I look forward to comments from the expert.

**Jeanene** · 22-01-2005, 07:18 PM

thanks fudosan
I understand the concept of taking more cash into other properties but the thing that concerns me most, is when do you become labelled as an investor and have to start paying taxes on each do-up or can you get around that by buying the property as a certain entity?
thanks so much

**orion** · 22-01-2005, 09:25 PM

Can someone please clarify for me with "Quick Cash" properties (do-ups), how do you avoid (legally) by paying tax on the profits you make from each house that you sell???
Our accountant told us that we would probably get away with the first one, but after that it is very risky????

Hi Jeanene, if you buy with the intent of selling and you make a profit, it is taxable whether it is your first deal, or your 100th one.
This also needs to be correctly set up to suit your own circumstances, in a separate entity to your long term rentals.
Your long term rentals then would not be taxable if sold for a profit.

Regards
Graeme Fowler

**spaceman** · 23-01-2005, 12:34 AM

If you intend to make money buy "trading" houses then the tax man will want his cut.
I'm not sure there is any possible way to avoid this. The IRD have this tainting rule and it seems it's pretty wide-reaching. Even to other people and entities (companies, trusts ) with the associated persons rule, I'm pretty sure two seperate trusts wouldn't help. But I'm no expert best go to see a tax lawyer or accountant.

A side thought, what's the problem with paying tax? If you are making a profit in a business surely you would expect to pay tax. It's your civic duty.

Unless of course you happen to have a winebox handy.

Goodluck

**drelly** · 23-01-2005, 07:40 AM

I asked my accountant about this recently and he said that there is no way to avoid tainting and that structuring to avoid it was a commonly held misconception. Apparently when it comes down to it, while the IRD see different structures in place, if they are linked to the same person, then it's the individual they're interested in, not the entity.

There's a thread on it: http://www.propertytalk.co.nz/posts2...ttainting.html

**orion** · 23-01-2005, 07:57 AM

Hi Dave,
I think it is important to be clear with this. If you have a separate entity, eg a company set up for trading and a trust set up for rentals - and it is done by professionals that know what they are doing (and the majority of accountants will tell you either that it's not possible, they don't know how, or will do it incorrectly for you), it is perfectly legal in the eyes of the IRD.
In other words, you pay income tax on profits with any property trading that you do, and no income tax on any gains if any of your rentals are ever sold.

Regards
Graeme Fowler

**drelly** · 23-01-2005, 09:32 AM

Hey Graeme,

I thought the same before but my accountant disagrees...

Can you reference any IRD literature to support it?

**orion** · 23-01-2005, 09:39 AM

Can you reference any IRD literature to support it?

Not personally, but my accountant could if he wanted to. It happens all the time with this type of question, and my accountant gets annoyed training others - and then half the time they still don't get it. You're best just to get an accountant that other property investors use that knows what he or she is doing.

Regards
Graeme Fowler

**Neo** · 23-01-2005, 10:53 AM

" I thought the same before but my accountant disagrees...

Can you reference any IRD literature to support it?"

Dave, my accountant agrees with you, he is also an investor.

Graeme, would your accountant be willing to post information on this forum to support his ideas on structuring separate entities?
It may create more business for him.

Most of us at some time or another will look at diversification, IE not only buying and retaining a property long term, but also buying and selling short term to increase our equity and servicing ability.

I would really appreciate and value more solid information/IRD literature in respect to Graemes comments.

Neo

**toby** · 23-01-2005, 11:21 AM

Hi Drelly,
I'd stongly reccommend you found another Accountant / entity adviser.
That advice scares the bejesus out of me!
Two independant entities set up by an expert in their field is a must.

**orion** · 23-01-2005, 12:02 PM

Graeme, would your accountant be willing to post information on this forum to support his ideas on structuring separate entities?
It may create more business for him.

Hi Neo, I'll send him this link and leave it up to him whether he wants to comment or not. His job isn't to educate other accountants though.

Regards
Graeme Fowler

**Neo** · 23-01-2005, 12:06 PM

Thanks Graeme, I hope he sheds some light on this subject.

On another topic....
Your book is very interesting and very inspiring. It is wonderful to read about various people and their individual pursuits for wealth creation through property - good on you for writing it and sharing your wisdom with others.

**drelly** · 23-01-2005, 01:08 PM

The "yes you can - no you can't" debate can go on forever but the bottom line is that regardless of your intentions, if you sell a property after a short period of time that you had *intended* to keep in an LAQC long term, then the IRD can (and have) come down hard.

Here's an example of someone that got it wrong... (about half way through)

http://www.company-solutions.co.nz/mwdata/Company%20Solutions/files/June%2004%20Tax%20free%20or%20Taxable.pdf

Sure you can set up different entities to do different things and I agree with the concept. But if you buy a house, put it in your LAQC and then sell it a year later for a great big profit because someone offered you silly money, then you're still potentially screwed! Once you buy and sell property short term, the IRD consider you to be a "developer". I'm sure that no one would be naive enough to think that just because they had two companies, the IRD wouldn't notice that your name was associated with both of them!

My understanding is that having two companies is merely a way of indicating your *intentions* it does not offer any legal protection whatsoever. I think that this is the misconception my accountant was referring to.

**Josko** · 23-01-2005, 06:14 PM

Originally posted by orion

Hi Dave,
I think it is important to be clear with this. If you have a separate entity, eg a company set up for trading and a trust set up for rentals - and it is done by professionals that know what they are doing (and the majority of accountants will tell you either that it's not possible, they don't know how, or will do it incorrectly for you), it is perfectly legal in the eyes of the IRD.
In other words, you pay income tax on profits with any property trading that you do, and no income tax on any gains if any of your rentals are ever sold.

Regards
Graeme Fowler

I interpret the situation to be relative to the ability for the investor to prove his/her position. I believe orion has been doing this for a long time and I am sure has great records (intention or not).

the onus is on the individual to prove that intention by way of ‘documentary evidence’. This will require copies of correspondence (which arose during the initial purchase) supporting this position, to be available on inquiry. Such documents would include correspondence with independent professionals such as the Real Estate Agent, Mortgage Broker, Structure Specialist, Lawyer, Accountant and/or Bank Manager, in which this policy needs to be stated. In other words it is completely inadequate to have intention by ‘thought’ alone. One must have the backup documentation in place to prove this if put on inquiry.

Thanks to drelly for pointing the issue out, not for the faint hearted.

Header Ad Module

Bradley Sugar's Property Wealth Wheel

Bradley Sugar's Property Wealth Wheel

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment

Comment