Trading Properties

[FreezingandHot]

Hi

I have been looking at properties over the last few weeks and realise that some of the vendors are not as motivated to sell than others, I have found a property that I think has potential but realise that the vendors are probably not in that much of a hurry to vacate, the problem I see with this is that I do not think this would make a great buy & hold because I would have to get the IP for $80,000k less than the list price for this to be cashflow +ve.

So rather than waste the time I have spent on looking at this property I thought about trading it.

My question is I have an LAQC, can I trade this property under this or am I better to set up trusts (trading) as has been suggested by a lot of investors on this site. Will I have to pay tax on profit, how much would I have to pay?

I think there is potential in this property to create instant profit just don't know how to go about doing it.

Regards

FH.

[cube]

Definately, you don't want to trade in you LAQC, because you would be tainted as a trader.

A trading Trust seems to be the flavour of the month, so a discussion with a Trust lawyer with knowledge of PI is in order.

Let us know how you get on, if you decide to proceed - it might save someone else some legwork

cube

[FreezingandHot]

Hi Cube

Yes I am seeing someone next week about setting up trust entities. I will ask then about trading and what should be put in place.

I don't want to damage my LAQC!

FH

[drelly]

You'll be "tainted" personally as a trader whatever you do. Either you're the trader, you're the director of a trading company or the beneficiary of a trading trust or maybe even the director of a corporate trustee of a trading trust. You can't trade a property without being a trader.

The important thing is to not do anything that can be construed as a trade within your LAQC.

By the way, if the vendors aren't motivated, how are you going to buy it cheaply enough to make a profit? Is it just underpriced?

cheers,
Dave

[FreezingandHot]

Hi Drelly

I guess what you are saying is whether the property is held in a trust or not I would still have to pay tax on any profit.

The property seems to be placed at a good price for the area, I have researched the prices in this particular area and it has good schools, close to town etc etc...

There is one factor however which I think reflects the price is that it is situated right next to the motorway which would make it more dificult to on sell quickly, but going forward if I can get it under contract at the right price I could afford to wait a few extra weeks to sell.

That is my thought process anyway, as Chris A says, "You make your money when you buy".

FH

[Propoholic]

Hi FH

FH wrote:

There is one factor however which I think reflects the price is that it is situated right next to the motorway which would make it more dificult to on sell quickly, but going forward if I can get it under contract at the right price I could afford to wait a few extra weeks to sell.

Make sure your market comparison is taken from properties that are situated right next to the motorway. Properties located a few streets back from the motorway are likely to be in a higher price range.

[FreezingandHot]

Hi Propaholic

That is a great point!! I have just contacted an agent in my are to get a price comparision for the area but did not ask them what a price would be right next to the motorway. How would I get such a price if no houses in the area where sold right next to the motorway.

Thanks

FH.

[Ivanhoe]

Patrick!
I will STRONGLY recommend talking to Garth Melville

http://www.company-solutions.co.nz/form.asp?idWebPage=6832

The price of setting-up yur structures PROPERLY would be only few hundreds more but ramifications of not doing it right are serious.
ASK:
1. What taxes should I pay?
2. How should I structure my entities?
3. What about GST?

re: purchase price lots of ppl do it backwards - FMV less 10% (you want to sell qiuck, right? so you will SELL at 10% discound compared to FMV) less your profit (5k? 10k? 20k?) less legal fees (say 5k) less agent's fees=purchase price

[Propoholic]

Hi FH

I'm assuming there are some adjoining streets right beside the motorway, you may haveto go back 6 - 9 months? to locate a comparable property. Get your agent to give you a print out of sales for the last 12 months and do a drive by. In the event that there are no sales comparisons (beside the motorway) get a good agent to advise you what the market discount would be for the motorway location as against 2 or 3 streets back etc. Rents will be lower and yields typically higher for the motorway location!

[cube]

I guess what you are saying is whether the property is held in a trust or not I would still have to pay tax on any profit.

Yes - if you are trading, then there is no way to avoid paying tax. You could try (and avoid GST costs too), but woe betide you, your bank balance and possibly your personal freedom if the IRD audits you.

cube

[FreezingandHot]

Hi Propaholic/Ivannhoe

Ivanhoe
Yes have been recommended by a friend to use Garth and Mike Vallant, thanks for the advice.

Propaholic
Just spoke to agent but she could not give me a comparative property in that area, so I will ask elsewhere to get a better idea of what it could sell for.

Thanks

FH.

[drelly]

Hey FH,

That wasn't really my point but yes, you're right. It would be really foolish to try and do anything even remotely resembling a trade within your LAQC.

My point was simply that if you do a trade, you *are* a trader. Regardless of your structures or entities, ultimately, if you have control of a trading entity, you're a trader - who also happens to have an LAQC. This whole "you can avoid being tainted as a trader" stuff is rubbish. Just make sure your LAQC properties remain squeaky-clean buy and holds!

[FreezingandHot]

Thanks Drelly


Fully understood, I like the look of trading but not the
additional costs that come with it.

Oh well, I have more homework to do, I'm not giving up yet, I know it can work somehow.

FH.

[cube]

Hey FH,

That wasn't really my point but yes, you're right. It would be really foolish to try and do anything even remotely resembling a trade within your LAQC.

My point was simply that if you do a trade, you *are* a trader. Regardless of your structures or entities, ultimately, if you have control of a trading entity, you're a trader - who also happens to have an LAQC. This whole "you can avoid being tainted as a trader" stuff is rubbish. Just make sure your LAQC properties remain squeaky-clean buy and holds!

But if all you have to do is make sure that your "LAQC properties remain squeaky-clean buy and holds", why can't you simply set up another company to do the trading?

The purpose of the trust, with its coporate trustees etc. is to remove you are far as possible from the LAQC, so that your name, or the names of you close associates, when comparing the LAQC ownership with that of the trading entitiy.

I don't think that people would mind being labelled a trader if it only affected properties that they had held for a 'short' time.

cube

[drelly]

Hey Cube,

I think that if I got audited, the IRD would notice that I'm director of the LAQC as well as director of a corporate trustee... or a beneficiary of a trust?

Trading trusts do have an asset protection value but I personally have a great deal of scepticism about the worth of all these "structural acrobatics" come audit time. If I'm not trading in a buy and hold structure then I'm fine. If I am, then I'm still stuffed no matter what else I did.

Sure, we can remove ourselves another step but it doesn't change the basic underlying fact that we're still associated with all these structures.

I find all this discussion about "tainting" really quite strange as so many people seem to think it's possible to do trades without being a trader while still being either directly or indirectly associated with a trading entity.

cheers,
Dave.