Setting up tax efficient structures for your property investments
What is a ‘Look Through Company’ (usually referred to as an LTC)? It is a limited liability company with the advantage that it allows you to be more tax efficient. We suggest looking at the information on the IRD website and talking to a tax professional first. Introductions will be provided if you’d like them.
If you have been making a loss in your investment(s) for several years (negative gearing), you can top up your mortgage under the LTC to pay back the shareholder(s) and, as a consequence, this new mortgage is a tax-deductible expense.
The second advantage is that you may attribute the loss to the higher income earner (for a couple investing together). If your family has a major breadwinner who earns far more income, and you own your investment properties jointly under your personal names, chances are you are losing money every year through inefficient tax structures. You will be able to save money every year with a revised structure.
As always you must seek good advice and you need to be careful. You do not fall into the ‘tax avoidance’ category with the IRD.
LTC ownership is common for NZ property investors.
Let’s take a look at this example. Jim is earning $100,000 as a sales manager and Sarah is a part-time caregiver earning $23,000. They own an investment property that is making a $15,000 loss a year. The ideal outcome would be to assign all the losses to the highest taxpayer in the family (with an LTC). Owning the property jointly (without the LTC) would mean the tax loss is split 50/50. By owning it in a company (LTC) you can split the shares and it would allow you to assign your tax loss to the higher income earner.
Let’s say they make $15,000 loss on their investment, their tax benefit owning it jointly would look like:
$7,500 x 17.5% = $1,312 tax back (Sarah’s income taxed at the lower bracket)
$7,500 x 33% = $2,475 tax back (Jim’s income taxed at the higher bracket) Total tax benefit = $3,787
If Sarah had another baby and decided to go on maternity leave, there would be no tax benefit for her.
$7500 x 33% = $2,475 tax back Total tax benefit = $2,475
However, if they own this investment property under an LTC; Jim can have 99% of the shares and Sarah has 1%. Even if Sarah went on maternity leave, the tax back would look like:
$15000 x 33% = $4,950 tax back Total tax benefit = $4,950
A $1,163 – $2,475 difference in cash in hand… every year.
We’d suggest you put this into your principal and interest payments for your owner occupied or towards extra insurance. Some people say that $2,000 savings isn’t worth their time. If you make $2,000 savings off the back of the work of others (your accountant and mortgage adviser) this equates to free pay you didn’t have to work for. If you make $2,000 a week and someone wants to give you a week’s salary for free… why not take it each and every year? This is the hassle-free that will get you to prosperity faster.
Are you thinking about LTCs or property investing this year? Let’s have a quick chat about it…
iRefi.co.nz are not qualified accountants and do not give tailored advice on LTCs. But we do have 500+ property investor clients, some of them use LTCs to help them become more tax efficient and for mortgage purposes.
In summary, the LTC rules are relatively complex but offer a useful tax structure including holding loss-making property investments (negative gearing), carrying out JV activities and other situations.