Owning an Investment Property in New Zealand

Owning an Investment Property in New Zealand

Many people make a simple mistake when it comes to owning an investment property (residential or commercial), putting the property in their own name. Although this may avoid the cost of starting a company ($250 - $800 depending where you go), you will pay much more when your portfolio begins to grow.

Traditionally residential property investors are middle aged people looking to diversify from term deposits and shares. They purchase a home, frequently paying too much for comforts' which will not increase their rental yield and put the property in their own name. At the start, the property is making a cash loss as well as a paper loss, after depreciation is taken into account. While it is in their name they take a 50% share of the loss to be allocated against their personal income. Partnerships were also used to divide the early losses, with the added bonus of being able to split the losses 65/35 to the highest income earner to get the greatest tax refunds.

The method ideally used is ownership through a company. This allows the share precentage to be split in the favour of the highest income earner when there are losses. Traditionally people have used LAQCs (Loss Attributing Qualifying Company) as these had the benefit of transferring losses to the shareholders to minimise tax. As of 1st April 2011 the New Zealand Government has made changes to LAQCs. Changes were required, as with an LAQC, people were entitled to distribute losses, but if they made a profit they were able to pay 30% tax on profits in the company name and hold the imputed dividend until they chose to distribute to ensure the top tax rate was not being paid by the individual. The most common option taken for these changes is a LTC (Look Through Company), losses can be distributed to shareholders in the year they occur as well as profits must be distributed in the year they occur. But as the NZ government has stopped depreciation on residential investment property, the losses will be substantially less.

The reason why the majority of accountants in NZ recommend company ownership for investment property is that when the property starts to make a cash profit it is no longer desirable to have that income added to the individual's personal income. A Trust is used to hold an individual's assets to protect them from health costs, inheritance squandering and higher taxes. The norm is to transfer this now profitable property into the trust to ensure the tax paid on the profits is 30% or lower. The issue arises with the transference of the property into another entities name, it is called a deemed sale by the IRD. Even though both entities are owned/controlled by the individual it is seen as a sale. Thus meaning all depreciation on the property to be recorded as depreciation recovered, making the income for that tax year to be greater, normally at the top tax rate! The new owner was entitled to depreciate the property again from the purchase date. This changed on the 1st April, now if you transfer the property, you will have to pay tax on the depreciation recovered and no longer get the right to depreciate the property.

If the property is in a company, the shares can be sold to the new entity. The property remains in the same name, i.e. the parent company. This avoids the deemed sale, the depreciation recovered and the unwanted spike in personal incomes. Planning ahead of the situation is always best.

At Canterbury Taxation we advise our clients on the most tax efficient structures to protect their wealth and plan for the financial future. Contact us on our Facebook page or look us up on the web. Till the end of May 2011, Canterbury Taxation will help you sort your asset protection structures for an incredible rate. $350 to incorporate your company, start a company file, company minutes and start your portfolio the right way from the very beginning. Owning an investment property does not have to be a stressful experience, simply involve Canterbury Taxation in the mix and we can help you take control of your financial well-being.

POST COMMENT

Industry Experts in Agreement, Istanbul is a Hot Property Investment Investment Terms Vary PPC Campaigns - Obtaining The Most From Your Investment Good Investment Last Edinburgh Letting Company for Best Property Investment Results Foreign property investment A lot goes into a fridge to make it such a big investment Investment property for sale - Choosing the right location for your investment property Investment property for sale - The Benefits of Caribbean Investment Property Investment property for sale - Investment Property for sale Find Land Investment Which Canopies Protect Your Investments Better? CRM: an expense or an investment? Investment Property Calculator Excel Free