Are we trying to scare you with land tax issues? Yes! | Beany

Are we trying to scare you with land tax issues? Yes!

Business, News, Topical Tax Issues

Be afraid, be very afraidAsk any tax specialist and they’ll have a horror story in their ‘land tax gone bad’ file. I’ve seen more than my fair share of disasters and usually the conversation starts with, “I’ve just signed an unconditional contract and the real estate agent/best friend/someone I met in the pub who does this all the time (delete as applicable) tells me that everything’s fine”.

No disrespect here to real estate agents – land tax is a very complicated area and even accountants get this wrong from time to time. One of the key issues is that what might work for one client does not work for another because of different scenarios.

I cannot emphasise this enough – if you’re signing a sale and purchase agreement, take 10 seconds to consider this – should I just run this past my accountant?  If it’s anything but buying the family home, the answer is always yes.  The cost of getting this wrong can be very high.

Key Features

There are three key types and each one is treated differently. Speculators, dealers and investors.

Three main factors can determine your status as a property buyer for tax purposes:

  • your intention when you buy a property
  • the patterns of your previous property transactions
  • your association to a builder, property dealer

So even which type of buyer you are is not always clear cut. Your intention is also absolutely critical – if you bought a property with the intention of making a profit on resale, then it becomes taxable, no matter how long the gap from purchase to sale. You may also be ‘associated’ to a property dealer and not have considered it – association can be a personal relationship (spouse, child or even a company part owned by your spouse) or via a trust.

Living in a property owned by your own company, partnership or trust

Danger, danger! I’m going to quote directly from the IRD on this one. The italics are mine.

They are really personable and helpful and have made the whole accounts process so straightforward and simple for me.

This guide focuses on LTCs but the information applies equally to trusts or partnerships. Using a LTC for residential rental investment can be a perfectly valid structure. However, we consider some LTC arrangements are made to avoid tax.

Problems arise when an LTC buys an LTC shareholder’s family home, and shareholders continue to live in the home and claim deductions (eg, interest, insurance, rates and maintenance) for the property. In most instances this is considered tax avoidance.

Expenses in relation to your private residence, whether owned by you, a company in which you’re a shareholder, a trust in which you’re a beneficiary or a partnership you’re a partner in, are not deductible.

beany-staff-slider-exampleDanger, danger! I’m going to quote directly from the IRD on this one. The italics are mine. “Some people buy or transfer a family home using a limited liability company, such as a look-through company (LTC) or trust or partnership, including a limited partnership. This guide focuses on LTCs but the information applies equally to trusts or partnerships. Using a LTC for residential rental investment can be a perfectly valid structure. Howe ver, we consider some LTC arrangements are made to avoid tax.

This guide focuses on LTCs but the information applies equally to trusts or partnerships. Using a LTC for residential rental investment can be a perfectly valid structure. However, we consider some LTC arrangements are made to avoid tax.

Problems arise when an LTC buys an LTC shareholder’s family home, and shareholders continue to live in the home and claim deductions (eg, interest, insurance, rates and maintenance) for the property. In most instances this is considered tax avoidance. Expenses in relation to your private residence, whether owned by you, a company in which you’re a shareholder, a trust in which you’re a beneficiary or a partnership you’re a partner in, are not deductible.

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