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Is Limited Liability Best

Is it better for a new investor to settle their first property in a limited company or keep it in their own name?

By: Property Investor Team

1 December 2019

Q

My wife and I have purchased our first investment property, settlement is in a couple of weeks. I’ve been told to look at putting the property in a limited company for asset protection. The property has been signed up under our own names.

I work for myself through a limited company and my wife has a separate fulltime job. This is a buy-and-hold long term investment and we are looking to purchase another property this year to start our portfolio. The mortgage is arranged under our own names. The property should be only slightly cashflow positive, but we’d be safer calling it neutral. So is a limited company the best fit? Would GST then be involved on the purchase price?

A

As a general rule, we recommend that our clients settle investment property purchases into limited liability companies. There are several reasons for this. For one, it provides you with a means of protecting the capital that you inject over time. Any money of your own that you inject into the purchase is treated as a loan from you to the company. Sometimes these shareholder loans can accumulate to significant amounts. You can assign the ownership of such a loan to a family trust to get asset protection.

Secondly, having the property and the borrowing associated to the purchase in a company means that there is clarity around the interest expenses associated with the rental activity. Where you have a rental property and rental borrowing in personal hands there is the prospect of the rental activity getting mixed up with your personal affairs and that can compromise the deductibility of interest. There are variables that will need to be determined in terms of the shareholding of the company and its tax status. You will need to seek advice on this.

Now is the time to act. If you move quickly to get the company established it is possible for you to nominate the company to settle the purchase and become the new owner. You will need to advise your lawyer and the bank as soon as possible of your plan to settle the property into the company so that documentation is prepared on this basis.

Finally, you ask if GST would be involved in the purchase price. From your perspective no GST is able to be claimed. In saying this, I assume that the property is a standard residential rental property and not a commercial property or one that you are going to rent out on a short-term-stay basis. - Matthew Gilligan

Work Change Impact

Q

My partner and I are in our early 30s. We own a couple of properties but are new to

property investing. We have been working full-time and are wanting to reduce our hours and look at doing contract work. This would result in us not having a steady paycheck but being financially better off from contracting plus work-life balance.

We want to know if this is going to negatively impact us going forward? Particularly if we want to borrow more money in the future for more investment properties, as the banks will look at us and see that we don’t have a “steady” income or full-time employment.

A

Often if you are contracting in the same field as the one you were previously employed in the banks will still take the income into account. Naturally, if your incomes drop this is going to reduce your borrowing capacity. However, it is hard to state the effect without being aware of more of your actual position. It would be best for you to see an adviser to assess your position. - Kris Pedersen

Failure In Duties

Q

We have just had tenants vacate our rental property after two years. They have left quite a bit of damage and the place really unclean. It turns out our property management company hadn’t been inspecting as per our agreement (every 90 days and four of eight completed). I was only emailed two inspection reports during the tenancy. The tenants were in breach of their agreement by having dogs who have badly damaged internal doors, walls, windows sills and carpet. In February this year, a neighbour emailed complaints to our property manager who never forwarded them to me as owner, and never acted upon them. The complaints involved intimidation of neighbours on both sides of the rental. Also, apparently, police have been involved with the tenants. The property management company have offered $500 as a good will gesture but I think that’s insulting. They are pursuing the tenants for rent arrears and damage.

A

It seems your property management company has failed to keep up with the duties that the agreement required. The company is required to act in the best interests of its client. Failing to do the required frequency of inspections has perhaps resulted in the company’s failure to detect and act on the tenant’s breaches. I suggest you document your issues fully and then talk with your property manager and see if you can achieve a settlement that you consider fair and reasonable. If you can’t agree, you still have an opportunity to make a claim against the company in the Disputes Tribunal. - Bernard Parker

Structure For Rental

Q

We have our family home in a trust and are looking at purchasing a rental property. The rental would be negatively geared for some years. We still have a mortgage on our family home and we will use equity from there to finance. How is it best to structure this? Should we purchase the rental in our own names? We anticipate selling the rental once we retire (we’re in our early 50s now).

A

In simple terms there is the choice of the trust you already have, a look-through company (LTC) or a partnership. Until recently a loss-making rental property would typically be structured to take advantage of the losses to offset personal income and save some tax at the personal level. This would require the use of a partnership or an LTC. Trusts were not favoured because losses could not be distributed to beneficiaries and had to be simply carried forward in the trust.

However, the Government has ringfenced residential property losses for the 2020 year onwards so there can no longer be an immediate tax saving by offsetting the losses against personal income. That means you are essentially in the same position as the trust.

One factor is the fact that the trust is being expected to place its home at risk to support the borrowing. This is easiest to justify as being in the beneficiaries’ best interests if the trust also stands to benefit from the income and growth over time in the asset’s value. So my vote goes to the trust where there is protection for the asset. But it would be sensible to consult an accountant who can fully explain the advantages and disadvantages of each structure relative to your overall position and goals. - Mark Withers

Demolition Notice Period

Q

We are looking to demolish a rental property to build a family home. Are we required to give 42 or 90 days’ notice to the tenants?

A

There are different notice periods for different tenancy types. For a periodic tenancy, a landlord must give at least 90 days’ written notice to end the tenancy. Landlords can give less time (at least 42 days’ notice) if: the property has been sold and the new buyer doesn’t want tenants (ie: the buyer wants “vacant possession”);

– the owner or a member of the owner’s family is going to live in the property;

– the property is normally used as employee accommodation and it is needed for this purpose.

A 90-day written notice will normally be required where the landlord wants to carry out demolition or construction work. A tenant must give at least 21 days’ written notice to end the tenancy, unless the landlord agrees to a shorter time.

For a fixed-term tenancy, a landlord or tenant cannot give notice to end the tenancy early unless both parties agree in writing to end the tenancy early. Every notice to end a tenancy must be in writing, give the address of the tenancy, the date when the tenancy is to end and be signed by the person giving the notice. - Jennifer Sykes

Missed Inspection Cover

Q

I’m going away for an extended period of time over the festive season and I can’t commit to my periodic inspection. If I don’t organise an inspection will I still be covered?

A

Technically, if you do not comply with the policy condition you will invalidate your insurance, but to what extent that depends. Depending on your insurer you will either invalidate the tenant-related losses or the entire policy. Tenant-related losses are things like meth contamination, malicious damage, and associated loss of rents.

To understand the extent of the risk you are taking, you should first work out your insurer’s approach. If, for example, you are insured with Initio, it’s only the tenant related losses that would not be covered due to your breach of the inspection condition. Another thing you can do is make contact with your insurer and let them know your situation. If they are good they will work with you on this and likely give you continuity of cover while away.

If you become a member of the NZ Property Investors’ Federation you not only get a discounted premium, but the requirement for property inspections is more relaxed four-monthly terms. - Rene Swindley

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