Rental Property Trading Structures
In New Zealand residential rental properties are often privately owned, but they can also be owned by Partnerships, Trusts, Limited Liability Companies and Look Through Companies. What trading structure is best for you depends on your situation and what your plans are.
Privately owned rental property is when the property is purchased in your name and all rental income and expenses are declared in your personal tax return (IR3).
When the property is jointly owned by more than one person, the rental income and expenses is split between owners and declared in their personal tax return.
A partnership is similar to joint ownership but a partnership has its own IRD number and requires a Partnership income tax return (IR7) to be prepared each year as well as each individual partner's tax returns (IR3). Partnerships have no tax advantage over joint ownership.
Limited Liability Company & LTC
A Limited Liability Company is a separate legal entity and the owners are the shareholders of the company. The company owns the property and will be assigned any mortgage directly. It trades with its own IRD number and requires a company income tax return (IR4) to be prepared each year as well as the shareholder's individual tax returns (IR3). The main advantage of a Limited Liability Company is that the shareholders liability is limited (shareholders private assets are protected in the event of claims against the company) and the flat company tax rate of 28% offers the possibility of tax advantages. Limited Liability companies are recommended when clients are planning to build large rental portfolios or when planning large investment ventures.
A Look through Company (LTC) offers shareholders limited liability however the flat company tax rate will not apply as all profits generated will flow through to the individual shareholders based on their shareholding percentage and included in their personal income tax returns.
A Trust is a separate legal entity that can hold and protect assets from creditors and former partners. A trust is formed when a person (settlor) places assets under the control of a person(s) (trustee) for the benefit of some other person(s) (beneficiaries). The details of a trust are documented in the trust deed. Placing properties into a family trust may allow wealth to be preserved for your family's benefit in the event of your death as trustees are required to act int he best interest of you and your family (beneficiaries). Trusts are taxed at a flat rate of 33%. Trusts can be good for asset protection but are expensive to setup, administer and have limited tax benefits. If trust are not set up and administered correctly can be challenged for validity which may result in having no asset protection benefits at all. For this reason trusts should be set up by a good lawyer who specialises in trusts.
When deciding the best ownership structure for your investment property it is a good idea to seek the advice of experienced professionals. Before you start building your investment portfolio come see us at Mt Albert Accountants. Book a free no obligation consultation to discuss your property investment plans and what property trading structure is right for you.