The Accounting Hub logo
Client Portal
Enquire
The Accounting Hub logo
To LTC or not to LTC, that is the question?

by

Picture of Andrew Millington

Andrew Millington

Director and Chartered Accountant

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.

Categories

Related Posts

Cryptocurrency and tax: a growing blind spot for many professionals

Most of our professional and doctor clients who own cryptocurrency would not describe themselves as crypto investors or traders. In many cases they purchased some Bitcoin or Ethereum several years ago, made a few trades, and then largely forgot about [read more...]

Investing has changed – but has your tax thinking kept up?

For many years, New Zealanders looking to grow their wealth had two main options: term deposits and property. Building a diversified share portfolio in the style of Warren Buffett was often out of reach for ordinary investors, as buying a [read more...]

Why good monthly processes make year-end accounts easier

As the end of the financial year approaches, attention often turns to year-end accounts and tax compliance. For many business owners, this can feel like a compressed, high-pressure process where everything needs to be finalised at once. In practice, the [read more...]