Trading as an option for a newbie

[Oopsick]

Hi everyone

There are lots of you here with huge experience in PIing so I decided to post my story to your judgment and advise.

Now that I know a bit about investing I would like to start my journey sooner rather than later but at the same time I know I need to be careful to avoid any mess.

I’ll appreciate all opinions.

My medium-term goal is to have a few positive cf B&Hs, short-term goal is to get capital to buy them.

This is where it gets tricky because although I am a good saver I am not willing to wait until my piglet gets fatter ;-) I know that some of you will say that saving is the safest way but… I think I am ready to take ACTION.

I’d like to do quick cash deals to raise the amount needed for a good deposit or two…

Trading is most appealing to me. I understand I need to buy well under value, sell it close to valuation or higher.
How long does the whole process normally take?
What are other big expenses apart from interest, agent’s fee?
What could be the pitfalls in my situation?
Is GST advantage or disadvantage in this case (I think it is former as long as it is sold for higher price)?

I also know that some investors buy and sell under a co’s name. Yesterday I happened to come across one C Accountant who was practicing giving advise to investors. She said I had to do Trading in Trading Trust from day 1. Here I was confused because I thought I could buy 1st into Co and than with the help of fresh profit create TTrust and start putting all the others into it.

Note: For future B&Hs I was going to create another Trust for holding.

Please brainstorm some feedback

[NZGEMS]

Hi Oopsick
The reason for using a trust is a trust can distribute to beneficiaries, being people or other trusts. where a company is a flat 33% tax. you can also distribute to charity from your trust.

I did use companies when I started out as that was the advise i had but now that I know more I am mainly using trusts, still put an odd one into the Companies but really only to perhaps replace a loan i was keeping on when a property was sold. I figured if I gradually wind down the companies it will also be less accounting fees only by having 3 or 4 entities I do have separate buy and hold trusts. I have 2 bandh and 1 trading trust plus several companies. I MIGHT keep one company, well see.

as far as trading goes, your fist one is bound to take longer because as you get to know the market better you will be better at choosing the right and wrong deals. No one can really predict how long it takes.

You dont have to use an agent to sell you could try to sell on your own. sometimes an agent can get you a better price though. so even though you pay fees you still end up with more than you would have got.

with trading you can also claim all expenses against your trust before you pay tax and that includes any course you might decide to do. Good idea to put the profit from your trades into you buy and hold.

I have a plan to own outright one day all B&H but I will still probably borrow now and again but i plan to have that much coming in i just end up with owning everything with plenty spare too.

Having said that I am good at managing to spend it too.

Hope this was some help.

Robyn

[lissie]

to me the biggest pitfall - and the one I can see no way around - is that the quick cash deals will classify you as a trader and you will have pay CGT on your profits - fair enough one might say. The problem is when later you purchase the B&H and if for any reason yoiu sell any of these - then you will still be classed as trader and still have to pay CGT. It appearrs that IRD are chasing those trading in property more and more and are also less and less inclinded to believe that your trust and your trading company are sufficiently separate to avoid "tainitng" .

[Dean@Massiveaction]

Hi Oopsick. NZGems and Orion are what I would call "professional" traders so Pm them and take them out for lunch.
Only comment I'd make is some people are cut out for trading, some aren't. But no money needn't stop you from investing. You just have to work smarter. Give you some ideas on Sunday!!

[Marcus]

to me the biggest pitfall - and the one I can see no way around - is that the quick cash deals will classify you as a trader and you will have pay CGT on your profits - fair enough one might say. The problem is when later you purchase the B&H and if for any reason yoiu sell any of these - then you will still be classed as trader and still have to pay CGT. It appearrs that IRD are chasing those trading in property more and more and are also less and less inclinded to believe that your trust and your trading company are sufficiently separate to avoid "tainitng" .

Hi Lissie,

The CGT thing is not quite correct. From what I understand, NZ has no CGT (I have heard it bandied around in a few different posts so I thought I might just point this out while I’m here). As I understand it, any profit is actually classed as taxable income as you are buying and then selling at a higher price, (less the costs and all going well, producing a profit).

It's a business, and should be treated as such.

The fact that you have traded property does not need to affect anything you intend to buy and hold in the future. If you know the rules or use the expertise of someone that knows the rules, i.e. an accountant that specialises in structures and property (ask around here, as there are a few that do this), you can minimise your chances of making fundamental errors.

Done right, there is no reason why you can't do both trading and B&H's. Like Dean said,

NZGems and Orion are what I would call "professional" traders so Pm them and take them out for lunch.

It is being done.

If you truly want to know how, ask better questions.

Regards,
Marcus.

[zensei]

to me the biggest pitfall - and the one I can see no way around - is that the quick cash deals will classify you as a trader and you will have pay CGT on your profits - fair enough one might say. The problem is when later you purchase the B&H and if for any reason yoiu sell any of these - then you will still be classed as trader and still have to pay CGT. It appearrs that IRD are chasing those trading in property more and more and are also less and less inclinded to believe that your trust and your trading company are sufficiently separate to avoid "tainitng" .

I thought if you make your genuine intention clear at the time of purchase (that you purchase to hold long term), then the IRD would not classify you as trader if for some reason you decided to sell? i.e. you make a written statement about your intention and have this statement kept by your accountant or lawyer so they can show it to the IRD if necessary.

Assuming that you do have separate entities for trading and buy&hold, will the IRD still classify you as a trader in this case?


Andre

[17billion]

If I remember right, we have a trading company which is owned by a trading trust. I cant remember why....I sorta leave the structures to the accountant.

and no, you won't be tainted as a B & H investor if you use the right structures.

Seeyah later

[Oopsick]

Robyn:

I did use companies when I started out as that was the advise

Did you find yourself being tainted in the future because of that? I understand that you have a special thrust to hold your B&Hs. Does it provide enough protection from tainting?

I was told that if buy my 1st Trading under Co’s name and put all future B&Hs into holding trust they are tainted anyway because Co is connected to me. On the other hand I the same person said that if I buy Tradings into TTrust from day one I can put B&Hs where I want (my name, Co’s name or another trust) and they won’t be tainted.

What is your opinion on that?

[Oopsick]

Poomba,

NZGems and Orion are what I would call "professional" traders so Pm them and take them out for lunch.

Thank you. I’ll make a point of meeting them sometime soon
In the meanwhile I am looking forward to meeting you on sunny Sunday to pick up those idea :-)


Marcus,

I agree that a specialist’s advice here is vital. I am meeting one recommended accountant on Monday.

I thought it would be nice to hear different opinions and views before I go there
I went to APIA meeting yesterday and picked up some good ideas from there too. So it is all being very useful and informative.

Thank you

Andre

I will consider your suggestion

Re your question :
Assuming that you do have separate entities for trading and buy&hold, will the IRD still classify you as a trader in this case?

That is the answer I am after

[Chemill]

Assuming that you do have separate entities for trading and buy&hold, will the IRD still classify you as a trader in this case?

If you have set your entities up correct (accountant will advise on this) then the answer is no. One of the main reasons to have seperate entities is to avoid being tatinted as a developer or trader.

Chemill

[zensei]

If you have set your entities up correct (accountant will advise on this) then the answer is no. One of the main reasons to have seperate entities is to avoid being tainted as a developer or trader.

Chemill

Thanks Chemill.

In addition to having the correct structure, from what I understand, what matters to the IRD is your intention at time of purchase. As long as your intention is clear and you have a written statement to back it up, the IRD would have no problem with that and will not taint you.

Andre

[kelster]

Good thread.
According to advice I recieved,the difficulty with using companies for trading is they can be considered tainted if 50% of the shareholders are in common. For example, an individual is involved in two companies one for trading, one for B& H. If the individual has significant shareholdings in both (I can't remember the exact numbers), the B&H company will be tainted. Also, the IRD look at the actual practice and then compare it to the stated intentions. In the IRDs opinion, actions speak louder than words. Look at Wanaka and Queenstown PI in recent memory. I think this is why trusts are seen as a more appropriate vehicle.

[Oopsick]

In the morning I reread Property Tax book by Mark Wither
There was a reference to the list of associated people such as your spouse or girlfriend/ boyfrined, other close to you persons whose trading activities can affect your B&Hs. Interesting, ah?

The lesson is: Know who you are mixing with and have your B&Hs in a safe place

[RentMaster]

As long as your intention is clear and you have a written statement to back it up, the IRD would have no problem with that and will not taint you.

That sounds a bit to easy to me. If you wrote down 'I am buying a property for buy and hold' and then do it up and sell it a few weeks later, I dont think your written intentions will be all that relevant.

It is too much of a grey area for me. There needs to be more hard and fast rules. A bit like the depreciation rules. Ask different people for their opinion and you get different outcomes. How are you supposed to follow the rules if you no-one can tell you what the rules are.

The IRD really needs to sort these types of issues out.

[Marcus]

As long as your intention is clear and you have a written statement to back it up, the IRD would have no problem with that and will not taint you.

That sounds a bit to easy to me. If you wrote down 'I am buying a property for buy and hold' and then do it up and sell it a few weeks later, I don’t think your written intentions will be all that relevant.

You are right there RentMaster. This is why I would always suggest that anyone that is contemplating this line of business, consults a professional in the field. They will most likely give you a list of 'do's and don'ts'.
From what I understand (i.e. don't take this for gospel), regardless of documenting transactions, repeated actions of buy/selling will create a pattern that may prove difficult (and expensive) to argue when in court.

The simplest solution comes from what I have heard the likes of Graeme Fowler and Chris Ashenden say, and that is to be clear about the purpose of each property when you buy.

There is no confusion.

The trading or B/H activities taking place in their separate entities creates a history (pattern) and it becomes evident when analysed, what the purpose of each entity is.

Like I said earlier, I would suggest anyone considering doing both 'trading' and 'Investing long term', obtains professional advise.

There will be little use saying to the auditor, " ...but that Marcus (or who ever else) guy on PT said...".

Cheers,
Marcus.