Residential Investment - appropriate vehicle?

Hi there,

I'm looking into buying (and holding) my first residential investment property (with a friend) and was just wondering what the best vehicle would be to structure this under would be.

From what I can understand under a company you can expense the interest payments but would this make the property liable to a capital gains tax on sale (say after 5-10 years?)

Alternatively if keep the property under my personal name, from what I understand if I buy/hold for a reasonable period of time, I'm not subject to capital gains tax however will be paying 33% tax (my marginal tax rate) on the rental income, and won't be able to claim deductions for certain expenses.

Any advice would be welcome.

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Originally Posted by Whipmoney

Hi there,

I'm looking into buying (and holding) my first residential investment property (with a friend) and was just wondering what the best vehicle would be to structure this under would be.

From what I can understand under a company you can expense the interest payments but would this make the property liable to a capital gains tax on sale (say after 5-10 years?)

Alternatively if keep the property under my personal name, from what I understand if I buy/hold for a reasonable period of time, I'm not subject to capital gains tax however will be paying 33% tax (my marginal tax rate) on the rental income, and won't be able to claim deductions for certain expenses.

Any advice would be welcome.

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You are obviously buying with the intention of selling. If you make a profit it's taxable.
You might be paying 33% but only on the rental profit - not the income. Expenses don't form any part of the profit so are deducted from the amount you are taxed on. You can no longer claim the building's depreciation.
There is no capital gains tax, although in certain circumstances income tax is levied on capital gained.

The tax treatment is the same for both, same deductions. Its just the tax rate that is different. Personal is your marginal rate whereas company is 28%.
You will be taxed on 'capital' gains via both if your intention is to sell at the profit. Most people just lie and say they bought for rents, even though most are cashflow negative.

If you do buy via a company, it may be more difficult to get the profits out once you sell.

Hi Fungus,

Just as background personally I'm seeking to build up a portfolio over time and as such I'm not actually intending on selling (ever) however given that I would be buying this one with a friend then circumstance may require that I sell the property (or buy it off him) at a later date.

So if I'm reading your right, if the property is under our joint names then we are able to deduct interest costs to derive a taxable profit?

Quote:

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Originally Posted by Whipmoney

Hi Fungus,

Just as background personally I'm seeking to build up a portfolio over time and as such I'm not actually intending on selling (ever) however given that I would be buying this one with a friend then circumstance may require that I sell the property (or buy it off him) at a later date.

So if I'm reading your right, if the property is under our joint names then we are able to deduct interest costs to derive a taxable profit?

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That sounds like a far better arrangement than buying with the ultimate aim of selling.
Of course interest is deductible. What you pay out in interest obviously reduces your profit, and it's the profit you pay tax on. The ownership structure doesn't change that.

P.S. It doesn't matter what you borrow against. The property you are purchasing, your own home, your mate's home or your uncle's caravan if you can get away with it. It is the purpose you borrow for, not the security given to the lender, that determines its legal deductibility.

Recommended reading. IRD 'Rental Income'. Matthew Gilligan's 2 books.

Assuming you are buying at current outrageous prices and getting a small yield with large borrowings resulting in rental losses then I would suggest you have two options.

A partnership with you both as “Tenants in Common” not “Joint Tenants” or a Look Through Company(LTC)which is much like a limited liability partnership anyway.

An LTC might provide some limited liability in certain circumstances (none that springs to mind but landlords on this site might have some examples) but with no depreciation on houses the issue around buying out partners and depreciation recovered isn’t as big an issue anymore and partnership or LTC you will likely have the same issues buying out your partner. An LTC might also raise other issues around loss limitations etc but this is unlikely. Same rules apply to both regarding income and deductions.

If you are making profits then having a normal company makes little difference except as mentioned above if you sell the house getting capital gains out tax free would involve winding up the company.

This is just my opinion and I am always open to debate.

There is still no capital gains tax in NZ personal or company. John Key is talking land tax on foreigners because he is smart enough to know the average voter doesn’t care about capital gains tax on foreigners (they don’t vote either). National should grow a set of balls and come out with a capital gains tax to match Labour in the next election. People will vote out of self-interest but if “leaders” from both sides of the house can see it as a good idea don’t give the weasely voters a choice (Mind you it could backfire resulting in Prime Minister Winston). Even Olly Newland has come out in favour of a capital gains tax. To be honest still not sure how it would work in practice but Olly’s idea of reducing the taxable income by 10% each year for your own home would mean anyone living in their own home for 10years or more effectively has an exemption. Other people don’t have to lie about their intentions anymore making honest people of them.
Sounds like you should talk to an accountant first and read some books to confirm what people are telling you.