Property restructure fish hooks

From time to time we get asked by clients about moving their rental property into a different entity. Usually when doing this, a property will be “sold” to a related party.

aerial view of houses in street

The reasons for the request vary but usually relate to a change in the relationship of the people that own the property, a perceived tax benefit from restructuring the finance at the same time as the ownership or else a new desire for asset protection.

As property transactions tend to involve big numbers it pays to consider the broader picture before making any change.

General Anti Avoidance Rule

One rule which may cause issues here is the General Anti Avoidance Rule (GAAR for those who like acronyms!) contained within our income tax act. Put simply, this allows the IRD to void any transaction where the dominant purpose of the transaction was to save tax. This is a risk to be considered for people wanting to move some of their lending from their home mortgage to their rental property.

Depreciation recovery

There has been no depreciation allowed on buildings in NZ since the 2012 financial year. Despite this, many people with investment properties have held the property for longer than this so have claimed some depreciation on the building in the past. Other people have claimed depreciation on parts of their rental property, for example, the carpets, or the dishwasher.

With prices having risen significantly across most of New Zealand over the last few years, much of this depreciation will need to be added back to income if the property is restructured into another entity. This may bring forward significant tax liabilities in some cases.

Bright Line Test

Even if neither of the first two issues apply in a particular situation, it is always worth considering the “bright line test”. Brought in by the National government in 2015, the bright line test had the effect of making the profits on the sale of any land (except for your own house) taxable if the property was sold within 2 years.

The new Labour led government has extended this timeframe, effective 29 March 2018, to 5 years.

So any property restructure will have to be considered as part of a longer term strategy if a taxpayer wants to avoid being caught by this tax.

As always, everyone’s situation is different, and this commentary is general in nature. It would pay to get specific advice for your situation. Feel free to contact us to discuss further.

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