Getting the Structure Right

[Ameera]

Hi there,

All the info on this site is absolutely tremendous! My partner and I are ready to take our first step by using our current home (too small for us) as an IP and hopefully purchasing another one in the near future. Have noticed many of the seasoned investors on this site stressing the importance of getting your structure and finance right from the very beginning. Would appreciate the answers to a few questions and any input as to whether or not we are starting on the right foot. Critique away. :-)

A few facts:

House purchased in 2003

Original purchase price - $145000
Current value - $250000 approx.
Current mortgage - $127000
Expected Gross Rent - $15600 ($300pw)

Our Accountant has suggested setting up an LAQC and selling the property to it, then refinancing and getting a flexible loan which would allow us to fix our current mortgage ($127000) and have the remainder on standby to use as equity for another IP.

At present there aren't a great many advantages to us setting up an LAQC. My partner and I are both in the same tax bracket but, as he earns more than me, our Accountant has suggested putting 99% of shares in his name and 1% in mine. She has quoted us $400 to set up the LAQC and around $1200 p.a. to do our Returns. Does this sound about right? We have never had to use an Accountant so don't have any point of reference for the fees she has quoted. I have had a look at previous posts on this forum and think her fees are probably pretty average.

Are there any advantages to having the Accountant set up the LAQC? As far as I know, we could do it ourselves for around $60. Family members have suggested we do our own Returns as well. With only one property, they should be fairly simple and straight-forward. Any thoughts? Do IRD really prefer everything to be done through an Accountant?

Our Accountant has also told us not to bother with a chattel valuation as the orginal purchase price was low and is what all depreciation will be based on. Is it worth getting a chattel valuation on a very basic house? The house is about 17yrs old and is just your typical weather board house.

Finally, with only one IP, is it a waste of money to set up an LAQC at this point? Woud love to save the money now but wouldn't we trigger depreciation recovery if we rent our property out now and later on choose to transfer it to an LAQC?

Any advice/comments are very welcome!

Thank you!

[Chemill]

Well I've just done what you are about to do.

First I had the house valued (for market price) and for depreciation - this was two seperate reports.
Reason: Market valuation to justify selling price to LAQC & for refinance, and depreciation breakdown to MAXIMISE depreciation.

I set up my my LAQC online and from the IRD forms, but there was a company book thingy that I didn't know about but my accountant sorted that out - It didn't cost me anywhere near $400. My tax returns for myself, my partner, and the LAQC all together came at a price just under $900.00 - I did provide them with all my journal entries, balance and Profit & loss from MYOB, trying to make their job easier.

My accountant: Duns Limited in Christchurch

regards,

Chemill

[SEIBU]

setting up company LAQC yourself

I would recommend setting up the company yourself for $60 .

Click the link below to go to the Companies House site, which gives a step-by-step guide on how to enter your details and set it up.

http://www.companies.govt.nz/pls/web/DBSSITEN.main

From there click on: Information Library / 2.Companies register / 2.Form a company to see the guide.

Registration is very quick, within the hour you'll receive an email containing documents to sign and fax off.

You will also need to send the IRD two forms:

IR596 - Company IRD number application form
IR436 - LAQC application form

Send these with the company certificate (which you will receive once you fax those forms off I mentioned earlier).

Hope this helps you save some money

Good luck

[SEIBU]

IRD forms online

Also, get the IRD forms here:

http://www.ird.govt.nz/

Enter the form numbers in the search bar to locate them.

happy house-hunting.

[drelly]

Your process is confusing... perhaps you misunderstood the accountant? Why are you talking about fixing your current mortgage of $127k after selling to the LAQC? If you transfer the property to the LAQC, you should be doing it at market rate ($250k), so the LAQC will have a $250k mortgage and you'll have around $123k in equity in another (personal) property. To do it any other way would waste much of the tax benefits of forming the LAQC in the first place.

At a rough estimate, with a 250k mortgage in your LAQC, you'll be making at least a $5000/yr loss before any depreciation.

[Ameera]

Hi there,

Thanks for the replies! :-)

Chemill,

Thanks for the info! Who did your valuations? How much did you have to pay for the two reports? Our Accountant told me that depreciation is based on the original purchase price. Thus even if we were to sell to our LAQC for $250000 depreciation claims for the house & chattels would be based on the original purchase price of $145000.

What was the "company booky thingy"? :-) Is it something I need to be aware of as well?


Seibu,

Thanks for all the links. Have downloaded the forms and will set up the LAQC myself.

Drelly,

At this point my understanding of finance options is very basic. The Accountant did suggest that we sell the property to the LAQC for market value ($250K). She said the LAQC could then have a flexible loan but that we would only pay interest on the part that was drawn down - initially this would be $127K. As the interest rate is higher on a Flexible loan she suggested we fix the $127K for 1-2 yrs.

We would then be free to look for a 2nd IP and could draw down from the $123K as equity for another property when we find something suitable. Have I understood her correctly?

Cheers,

Ameera

[jadelotus]

Getting the Structure right

Have you consider setting up a trust instead of an LAQC?
With an LAQC, whether it is 99:1 or 50:50 split you still ultimately will own an appreciating asset [as your property value increases so too does the share price of your LAQC] and if u set up a trust later on it will take a long time to complete the gifting process.

always best to have appreciating assets in a trust structure.

the downside is that if you are anticipating a negative cashflow after depreciation then with a trust structure, you can't offset this against your income but will have to carry it forward in the trust account until such time as you have a profit inthe trust.

However as you plan to have more IPs and probably should have investments in other asset class [eg equiteis, bonds etc for diversification] then you may have positive income from these to offset against your paper loss from IPs.

also your accountant is right in that whatever price you transfer the property into either an LAQC or a Trust, the depreciation can only be done on the original purchase price.

[jadelotus]

ameera,
see article about property structure
http://www.propertytalk.com/content/view/397/82/

[jadelotus]

also whilst I think of it, on tax returns, it's not rocket science stuff. you should be able to do it yourself and save all that accountant fee.
Afterall, you are the one who has to provide the accountant with ALL the information and bottom line is that even with an accountant if anything goes wrong, it is still your neck on the line.

I presume you and partner are on PAYE so do not do file any annual tax returns?
Once you own an IP you will need to do an IR3 each year.

With a spreadsheet to keep track of your rents, expenses and depreciation, completing the IR3 is not difficult.

with the $1200pa that you save you could even invest in some software that help u do the job.

or shout me dinner and I'll show u what to do

[Dean@Massiveaction]

Hi Ameera, plenty of advice here but it's not all great. There are a number of things to get right with your LAQC and your position overall can be affected enormously if you get it wrong. Whilst it seeems like a pain there is no substitute for getting decent professional advice. Many of us in the forum have learnt a lot over time and can make judgment calls pretty accurately because we've kind of been there done that, bu twhen you're starting out there are a heap of issues to consider with your structures. You really need to get in front of a good property accountant and make sure they understand not so much your current position but exactly what investing strategies you are planning on using.
I spent over 12K setting up structures etc. but it paid for itself within 6 months.
On the other hand I got some bad advice from a non specialist accountant that cost me $300,000 when i sold a business 2 years ago. So my advice is see a professional. Happy to give you some names or the business directory here has some good people. Don't guess and don't try and save $500 now and have it cost you thousands down the line

[muppet]

Hi Jadelotus

You said:

the downside is that if you are anticipating a negative cashflow after depreciation then with a trust structure, you can't offset this against your income but will have to carry it forward in the trust account until such time as you have a profit in the trust.

True but you can run a LAQC as well to get tax refunds.

When we started our journey, I set up a family trust that all our properties are owned by and also set up a LAQC 95% to me and 5% to my wife with which I have had tax refunds each year.


I suggest Ameera, that you sus out one of the accountants that have been recommended by Pooomba and others and spend some money and have a chat with them.

Regards

[CJ]

When we started our journey, I set up a family trust that all our properties are owned by and also set up a LAQC 95% to me and 5% to my wife with which I have had tax refunds each year.

Muppet, If your trust owns the properties, what generates the losses in the LAQC.

Ameera,

A couple of questions. Do you hae a personal house that you own and live in as this effects the financing decision. If you do and it has a mortgage, that is non deductible debt and it would be best for the LAQC to draw down the full purchase price of the IP to pay you cash so you can pay off the mortgage on your personal house.

Do you intend to purchase more properties. Silly question maybe but if you dont, the additional cost of the LAQC might not be worth it.

Also what is your long term goal as it may be better to set up a trust structure or at least consider whether at some point you will move to a trust structure and therefore plan how you will move things into at a later date.

My recommendation re setting up the company yourself is to do it - no point paying an accountant $100 ph, but then go to them to ensure that you have done all the paper work correctly re resolutions etc. If you want to do accounts yourself, ask your accountant to be your advisor rather than your book keeper. ie. you prepare accounts and tax return, then go to then, let them look at for an hour and then have a discussion , are you claiming all the deductions, have you made any mistakes, could your finance be rejigged to be more favourable. Use them for teh value add stuff rather than the mundane (until you can afford to get someone esle to do the mundane for you). They are still getting there fees and only doing the exciting work that they like rather than Debit here, credit there!

CJ

[Ameera]

Hi again,

Jadelotus,

We may look into Trusts further later on. With our current property we will be running at a loss once depreciation is deducted. Being able to maximize any tax relief will definitely make a difference.

Thanks for the advice on accounting etc. :-) The IR3 doesn't look that complicated so we may be able to file our own Returns. Will get more advice from professionals though.

Dean,

Thanks for the suggestions and look forward to meeting you.

Muppet,

I agree. Will be seeking professional advice. :-)

CJ,

We are planning on renting ourselves and using our PPOR as an IP. Yes, we definitely do plan to acquire more property so I can see that having an LAQC would be useful - probably more so in the future than now.

I like the idea of doing the books ourselves and just having our Accountant check them over. DIY doesn't look too complicated but I just wouldn't want to unintentionally do something that IRD may frown upon.

Thank you all!

Cheers,

Maria

[BusyLizzy]

Hi,
I currently have high equity in my own home, and am looking at getting my first IP over the next few months - then another 3-4 over the next year or so if all goes well. I plan to buy cashflow positive properties (before tax - if possible!). I am a salaried employee in top income tax bracket.

I recently spoke to a recommended accountant who does a fair bit of property-related work (and has had IP's for many years).

He has suggested that I not bother with an LAQC or a trust for the IP property (although he did recommend a trust for my own home, particularly before Mr Right comes knocking on the door!)

In other words, he has recommended that I buy the IP in my own name, and I will not be any better/worse off than if I had set up LAQC.

All posts that I have read suggest either an LAQC or a trust for the IP's. No one mentions using neither. Any thoughts on this? Does it sound like good advise from the accountant?

[Dean@Massiveaction]

In a word, no. It's terrible advice.