To LTC or not to LTC, that is the question?
Owning a rental property has become topical again with the recent positive movement in the Auckland residential property market. Besides the question of which property to buy and where (and ignoring the difficulties of increasingly crowded auction rooms), many property investors will be wondering which legal structure to use for their investment.
Loss Attributing Qualifying Companies (LAQCs) were popular in the past. That popularity contributed towards some negative media coverage directed at rental property investors, which in turn is likely to have influenced the government to repeal the LAQC rules, which took effect from 1 April 2011.
Since that time, LAQCs have not been an option for property investors. Despite record low interest rates and depreciation on buildings no longer being allowed, many investment properties still generate tax losses.
Existing owners had several options for transitioning to a different entity, which most LAQC owners would have dealt with by now (contact us if you have not – there is still time to do something but that time is running out).
At the same time as repealing the LAQC rules, the government introduced a new set of rules for Look Through Companies (LTCs). These rules are similar enough to the old rules that a casual observer may wonder what was gained by the change. There are some key differences though that property investors need to be aware of.
For new owners of a property that is likely to make losses in its first years of ownership, the decision in most cases will be between ownership of the property in their individual names and ownership in an LTC.
There are positives and negatives for each approach. Each ownership method will (in most situations) allow the owners to offset the tax losses against their other income. Using an LTC has some asset protection benefits and can be useful if changing the use of an existing property for example from a private dwelling to a rental property.
However, the use of an LTC needs to be weighed up against the increased costs in accounts and tax return preparation. The LTC regime also has several fish hooks which can lead to losses not being available to utilise in the owners tax return.
Contact us if you are looking at investing in residential rental property but are unsure as to which structure that you should use.