Minimsing personal tax with LAQC

[teach]

I am going to be setting up an LAQC later this year. I currently own 2 properties. One to live in and one I am renting out. I wish to buy another property later this year to live in and rent out my current home.
Due to my buying renovation jobs I have seen quite good capital gains and need only modest rents to pay costs (i.e. rental costs currently $315 per fortnight, rental return $460 per fortnight). The current mortgage on my home is $210 per fortnight and should easily get a similar rental amount.

My plan is this:
1. Have the LAQC own the first two properties. Sell them to the LAQC at a profit, based on a registered valuation and use the money to pay off as much of the third property as possible (as interest and costs will not be tax deductable).
2. When I wish to move on from house number three, sell to LAQC and repeating process of paying off current home mortgage to minimize nondeductible expenses.

My current income is such that I am now getting a portion taxed at 39%, so assume that doing it this way I will minimize my tax losses.

If I wish to borrow to buy more properties should I then borrow against the property I am living in ( which should have a large amount of equity in it if I follow the above plan), or, should I leave equity in the properties I am selling to the LAQC and let the company borrow the full amount (if this is possible).
e.g.
Home 1. Valuation $150K. Sell to LAQC at $130K. Mortgage owing is $55K so I would have a tidy lump of equity on my own home and in the company. Get revalued after sale to confirm equity in property.

Would I still have to use the property I am living in as security for further loans? Should I just shove up the debt the company owes and be prepared to borrow against whatever property I am living in? I plan to purchase further renos to make the capital gains.

Any thoughts? I want to present this to my accountant but would like some alternative view points because everyone has an opinion and sometimes they are not exactly accurate.

Cheers

[Roberto]

Hi Teach

When you sell your existing homes to an LAQC, they do need to be at market value - (you indicated that one sale will be $20k below valuation).
Also keep in mind that (according to IRD's rules) you can only depreciate from your original cost (associated party rule).

So if you originally paid $200k for a property and then sell it for market value $300k to your LAQC, then the LAQC can only depreciate based on the $200k cost (split out to chattels and building). However, this will be adjusted by any capital improvements since originally purchased.

What people actually do in practice may be different to this - but the IRD rules were clear.

[Melgee]

Minimising Tax with LAQC

Hi Teach
In my opinion LAQC's are a quick, inexpensive, short term fix. It is based solely on tax minmisation, and you cannot easily also obtain asset protection. Investment and property specialists such as Robert Kyosaki and John Burley (a client of mine), both from USA never agree to follow a policy based on tax minmisation. I generally advise clients to consider the other alternative of trusts, which is based primarily on asset security. You will not lose your tax losses, but the timing may be delayed.
Regards
Garth Melville C.A.
Managing Director
Company Solutions Limited

https://www.company-solutions.co.nz

[Kong]

Re Garths Reply

You can have the benefit of LAQC and Asset Protection.

If your LAQC has 25% equity, you can allocate 25% shareholding to the trust and hold remaining 75% in your own name and claim 75% of loss to personal tax.

Hence your equity is protected

It is a good rule to have no more than 10 properties per LAQC so that once the depreciation benefits are exhausted, you transfer the shares of the LAQC to the trust avoiding depreciation clawback and obtain asset protection.

Of course 10 or so years down the track after transferring shareholding of LAQC to trust, you wish to sell, you will then need to pay depreciation claimed back as normal but you would have had the asset protection all that time until sale time!

[CJ]

If your LAQC has 25% equity, you can allocate 25% shareholding to the trust and hold remaining 75% in your own name and claim 75% of loss to personal tax.

Hence your equity is protected

No. You have only protected 25% of your equity.

It is a good rule to have no more than 10 properties per LAQC so that once the depreciation benefits are exhausted, you transfer the shares of the LAQC to the trust avoiding depreciation clawback and obtain asset protection.

Dont want to argue this point here, just mentioning for completeness (start a new thread or find the old thread whre it was covered) but how do you transfer it to the trust. Sure you can sell the shares (very easy) but your 10 properties will proably be quite a bit once the deprecation benefit wears off whcih means it will take years to gift value into trust at $27k per annum), during which time you still have no asset protection.

[mariner31]

transfer the shares of the LAQC to the trust avoiding depreciation clawback and obtain asset protection.

Since you can claim depreciation as an individual (owned in your personal name) can you also then transfer the property back to the Trust without clawback or other financial loss?

Cheers,

Mariner.

[teach]

Cheers for that.
My main concern is not asset protection but tax minimisation. If I sell at market value both properties would no longer be quite as positively geared as they are.
I presume that if I sell at market value I will have to use the home I am living in as equity. That shouldn't be a problem as I would have a big lump of cash from selling the two properties to the LAQC (just have to make sure it goes on the mortgage and not on toys like that new Sage fly rod I have been eyeing up).

[mariner31]

transfer the shares of the LAQC to the trust avoiding depreciation clawback and obtain asset protection.

Since you can claim depreciation as an individual (owned in your personal name) can you also then transfer the property back to the Trust without clawback or other financial loss?

Cheers,

Mariner.

Ill answer my own question: Accountant said Yes. You can transfer as an individual to a Trust without Clawback.

[MJU]

Stage Two Gifting

How many of you have been along to hear Matthew Gilligan talk at one forum or another. He is always an entertaining speaker, and it is hard not to learn something at his presentations.

The last time I heard him speak it was one the subject of asset protection.

He favours LAQC's and I agree because usually the immediate tax benefits far outwiegh the long term asset protection benefits.

If you have your own house in a trust, yuo gift away the debt back to yourself for the starting equity. Once that is all gone what can you gift away to use up your $27,000 a year personal gifting allowance?

Matthew has a way to do this, quite elegant really.


BTW be careful of a repeating activity of doing up a house and moving on. Take some really good advice to avoid tainting.

Have fun

[fudosan]

Hi MJU,

Say a husband and his wife own an LAQC to hold a number of properties. When one of them dies, is it true that the LAQC must be dissolved? What can you do to let the remaining spouse continue the business? Thanks.

[CJ]

Ill answer my own question: Accountant said Yes. You can transfer as an individual to a Trust without Clawback.

Not sure taht this is correct. This would be a dispoals (becaue it is) and therefore depreciation recovery triggered.

Say a husband and his wife own an LAQC to hold a number of properties. When one of them dies, is it true that the LAQC must be dissolved? What can you do to let the remaining spouse continue the business? Thanks.

It is a company so doesn't disolve - I dont think Contact energy dissovles everytime one of its shareholders dies. May have to make new LAQC elections though (there are timelimits - but the company will exist, just the LAQC be lost if not claimed). The shares in the trust go to whoever is stated int the will (ie the wife as she normally lasts longer or to a trust or the kids).

[MJU]

Shares in an LAQC on death.

I think you will find that the death of a shareholder allows a close relative to "stand in the original shareholder's shoes" for most purposes. A fresh LAQC election is required, and there is a grace period to get this completed in.

Remember Death is a marvellous gifting opportunity - check your will is all set-up to gift off any remaining debt to the trust, and any distributions are to your collective trusts, not to individuals!

Cheers,

MJU

[fudosan]

Re: Shares in an LAQC on death.

I think you will find that the death of a shareholder allows a close relative to "stand in the original shareholder's shoes" for most purposes.

If no one is to stand in, can the remaining spouse take over the share and become the sole shareholder of the LAQC?

[MJU]

Yep!

The remaining spouse can stand in the shoes of the deceased.

[Kong]

LAQC and Depreciation

CJ

When you transfer the SHARES of the LAQC to the trust, you get asset protection, the proiperties are still owned in the LAQC name, hence no depreciation clawback.

It is only when you sell the property that depreciation clawback occurs.

Kong