• We have not just survived the recession but thrived through it and are experts at sourcing the right financial product for your needs
• Why use a Mortgage Broker rather than deal direct with a bank? Banks only have their product while we work will a variety of banks and non bank lenders, giving you many more options.
• Good experienced advice, working as investors for investors

Property is one of the largest investments you will make and helping you through the process is what we do best. More than just organising a mortgage!

As mortgage brokers we know which lender will be best in your case at the best rates

Lenders have different policies and criteria and you could be wasting a lot of time dealing with a lender with who you won’t qualify, why run the risk of missing out on your finance date by not knowing where to go for the best deal for you

Best of all, OUR SERVICE IS FREE !

So who pays us?
The mainstream banks do.

Does this have any impact on your interest rate to the bank?
No, not at all and often we can get a waiver of any application fee for you and some banks will contribute toward a portion of your legal costs (subject to bank approval)

If you need a non bank Lo Doc product then any fee will usually be capitalized onto the loan

Homelink Finance has been providing financial solutions for existing and referral clients for over 16 years. Tina Webb, The CEO is a Registered Financial Advisor and member of the NZMBA

Homelink Finance deals with 10+ different lenders from main stream banks to non-bank lenders

Even though the office is in Auckland we source finance for the purchase of residential property throughout New Zealand for both local (NZ) clients and those living overseas thanks to the internet, skype and phone communications

(Please note; this article was written in January so some events may already have occured, however the article is still very relevant)

1.  The global situation:

2.  Here in New Zealand:

3.  What you should do

The global situation:

Europe cannot survive in the long-term. It does not matter how many people desperately want it to, it defies the laws of economics. You cannot strap a bicycle to a car and keep driving; whether you will kill the cyclist or the attachments break, is irrelevant – it does not work.

Most people in New Zealand are bemused at how the whole European integration project survives, or how it happened in the first place; it  must be remembered that after World War Two most Europeans desperately sought integration as the best way of avoiding being invaded yet again; they were happy to sacrifice their nationhood for a certain peace.

European integration is a giant industry; honest figures are impossible to unearth but four years ago the core of the EU alone employed over 55,000 staff, most of whom were some of the best paid bureaucrats on the planet! Now a hundred thousand pen-pushers are fighting potential redundancy with all their cunning and that is why there is so much resourcefulness, ingenuity and blind faith in every latest sticking-plaster arrangement that comes out of Brussels..

Why has the issue evolved the way it has? It has been progressed by a series of downward steps – a classic case of the situation forcing the decision:

1. An indebted country needs more money
2. Traditional sources will not oblige
3. A stop-gap is found, increasingly recycling the same money or printing more making the situation worse – but no longer imminent
4. The leaders have another summit and pledge a little of their own money and
hope for enough from somewhere else – and yet more austerity
5. They announce a grand plan
6. Return to (1)

So why can the European leaders not sort the problem out?

1. They cannot pledge any more of their own money because it will reduce their
own credit rating.
2. Their voters (or constitutional courts) will not allow it.
3. Too much austerity will strangle their economies.
4. They are incapable of effective tax collection.
5. No-one else wants to lend them any money – when the 1 trillion EFSF was announced in November, they went cap in hand to China, Norway, Qatar, Singapore etc. – all the sovereign wealth funds. Be honest, would you lend a country in Europe some money right now? Should your super scheme do it?

Why are the commercial institutions who seem to control the issue so reluctant to drive home the final nail in the coffin? Firstly they are benefiting from the increased margins they can justify – and secondly they need time to extract themselves from the areas of potential fallout – as much time as they can.

Graphs of exposure to European debt read like president Obama’s popularity ratings, high on the left and going down over time with a fierce slope. So this debt is being held by less and less parties (and the IMF) as everyone (who is able to) ducks out of the house of cards, leaving the ECB lending to European banks who then lend to European governments who, if they were a mortgagee would be deemed unable to pay – no wonder the ratings agencies disapprove!

In other currency unions, mobility of resources balances out differences in productivity levels. In the US, jobs – and therefore people – move from state to state as a consequence of relative economic health. This option does not exist in Europe; Greeks and Danes do not, will not and (due to language) cannot up-sticks and relocate to act as a balancing factor.

The focus on austerity, correct though it is, overlooks the fact that if you purge a country’s cost base by axing spending you must replace that demand due to increased competitiveness. In this instance, that can only happen as the Euro slides and slides. If it slides and slides, who will want to hold it?

In a nutshell, it does not matter how much people want something to work, if it is impossible, it will not work, no matter how unthinkable the consequences. So it will fail, the only questions are how and when.

There are sliding scales of how painful the split will be, how quick the process will be and how fragmented the end result is, and those are, it must be confessed, beyond the ability of this consultancy to predict with enough certainty to stake our name on it. We hope it is soon, so the consequent recovery can start as soon as possible – which is brutal but better.

 What will happen?

There will be two ‘shock waves’ following the primary event –

the first will be almost immediate and will see a seizure of finance for a few weeks, similar to 2008 but better controlled (by dint of being anticipated). This will not be as bad as it sounds because a lot of planning has gone into it already.

The second will diminish global demand and be more like the falling of the tide than a tidal wave. The good news is that while Europe and European firms will be hampered by legal complications and austerity for some time, the resources they would have consumed will be eagerly consumed elsewhere (see below).

We talked last year about the world needing inflation. The IMF’s Quarterly Publication, Finance & Development, talks about ‘financial repression’ which is when governments implement policies to channel to themselves funds that would otherwise go elsewhere.

High reserve requirements, implicit caps in interest rates, directed lending by captive domestic audiences and a whole host of other unseen tools allow governments to drive down their debt by creating real world inflation and underpaying for sovereign debt.

If governments make real interest rates negative (which they are) it is in effect a tax –subtle, effective and necessary but a tax nevertheless. (NB this is an unstated reason why the Europeans want to stamp on the City of London – it acts as a competitor and obstacle to the financial repression they have exercised for decades)

America might rally behind Mitt Romney and elect a man who can sort out its problems, but the chance of his wheels coming off at some point are still significant. The American political system is broken as irreparably as the European financial system; the process of ‘Gerrymandering’ has created an electoral system where the vast majority of electorates are a certain victory for one side or the other.

Therefore the main intent of the candidate is to win as much of their party’s support, rather than moving to the centre. American politics is so polarised now that the lowest number of Bills ever have some element of cross-party support, by a considerable margin.

In order to be sure of winning the Republican nomination, a candidate must have the kind of line on guns, abortion, gay marriage that makes them unlikely to be open-minded about other matters. This polarisation leads to fanaticism – neither side listens to the other and sees dissent amongst its own as heresy; most Republican voters have such a blanket opposition to raising taxes they will not permit it even as part of a package to close loopholes – even though their tax code is now 3.2 million pages!

The American economy will gradually improve this year but the rise in their currency (due to the demise of the Euro) will hamper their manufacturers just when things start to look better – so whilst it wont be doom and gloom, the US economy is not poised to be the engine of global growth. One step forward, one step backward.

Luckily, given the above, there is the rest of the world and even though China
and Russia might be faltering, India continues to march onwards along with SubSaharan Africa which is showing record levels of growth (despite Zimbabwe and South Africa). This is the year – nay the decade – of the G20 country and expect the likes of Turkey, Indonesia, South Korea, Brazil and Thailand* to power ahead and drag with them many of their neighbours.

Europe’s lack of demand will help these countries more than it will hinder them and the rise of their own domestic consumer will be a regional boost and drive global demand for raw materials. There is not the space or need to go into developing economies in too much detail, but there are a good number of larger countries who are doing well through efficiency, enthusiasm, and innovation.
* Not actually a G20 country but similar to the other examples and one of several economies that are almost big enough to warrant inclusion – while opinions differ slightly, there are roughly 32 larger economies in the world and in the above we are referring to that group less China, Russia, Europe and America.

And here in New Zealand:

European suppliers

This advice is taken from the Outlook last year, when we had the courage to say:
If you deal in the Euro you simply cannot afford not to plan for its collapse. Consider the potential and likely impacts on your supply chain (or customer base) in the event of:
1. Price uncertainty
2. Currency collapse (would your suppliers run out of their raw materials)
3. Interrupted supply
4. Strike action
5. Inability to conduct financial transactions

To that we would now add a year later, avoid entering into contracts in the Euro if it can be avoided, or ensure that some provision is made for an alternative currency.

Cashflow.
The BMC did worry that January 2012 would be as painful as January 2009 for some businesses, but it has proved smoother than that. We hope to see things loosen off slightly during the year (see domestic demand below) and would hope that our banks (who are to a degree insulated from the European shock-wave) will have the courage and decency to leave matters as unaffected as possible. A tall order, some might say.

Christchurch
There are two questions to be answered about the fate of the garden city:
Will it ever stop – and will the much-vaunted construction bubble ever come? The BMC is pessimistic about the end of ‘aftershocks’ (see below) and is concerned that safety and insurance concerns could see the rebuild take place in dribs and drabs, especially if further after-shocks continue to change the perception of where is and is not safe to build. This is a situation where there is no right answer and the government will be all too aware that its handling of this matter could well define their next election campaign. We suspect that it will not be until the tail end of 2012 that the industries who will supply this re-build will enjoy a decent amount of uplift; it will take longer than everyone imagines, not for the first contract, but for the certainty of further ones.

Farming
Take comfort that the lousy weather this holiday has improved household balance
sheets (by reducing spending) and added a couple of billion dollars to our balance of
payments. Fonterra was on track to add 10% to last years supply (March year) and
anyone who has a garden will know that the two days of rain, two days of sun cycle
which has lasted since early Dec is amazing for growing – especially grass. As the G20 (32) countries mentioned above continue to bloom, expect New Zealand’s primary produce to find new markets in ever more growing regional economies. This is good for us and will ensure that farming pumps a large injection into the economy this year.

Export
This is the decade of the G20 countries (and a few more who almost make that list)
New Zealand exporters (and their suppliers) should be looking at Mexico, Turkey,
Indonesia, Canada, Australia, South Africa (with caution), Brazil etc. etc.

Imagination
is the key to success in externally focussed businesses; many export statistics will look completely different by 2020!

Wise non-exporters will position themselves in the value chain of productive, export industries as areas of natural growth, and away from fickle internal consumer-driven demand, where possible.

Internal demand
There are some indicators that internal demand is now rising, albeit only in some
sectors – and many of those sectors (such as some aspects of residential onstruction
work) have structural constraints or can access unused resources in neighbouring
sectors, meaning that over-heating is unlikely. Retail demand will continue to stay
muted; household balance sheets may be partially restored but underlying consumer confidence is literally less reckless than it was five years ago, and as a result consumption habits have changed.

The BMC hopes that the positive effects of Christchurch and farming will lead to a
strong performance from the third quarter onwards; that investment in plant and
people will lead to a higher velocity of money and ambitious budgets for the year
ending March 2013. Unless the fall of the Euro happens by then (or its fall is more a gentle lowering to the ground, which we consider unlikely) then internal demand will be a gentle upwards slope, with Business Confidence returning after the first quarter uninterrupted by bad news.

In summary, there is growing internal demand (albeit with considerable sensitivity to negative events) – expect slow growth in the first two quarters then much stronger from July onwards. When Europe goes, expect it to halve the growth for that quarter and take a quarter off the growth for the subsequent quarter.

Further seismic activity
As a client remarked cheekily to The BMC recently, if it was your wife/husband/mother-in-law who was grumbling away like the seismic activity is
around Christchurch (and other parts of the country), you would think the worst was still to come. While The BMC does not offer geological forecasts as such, we consider the chances of further activity substantial (in some form) and urge all businesses to:
1. Revisit their risk management
2. Consider their crisis management
3. Revisit their insurances critically

Currency
With so many things in the melting pot, it is a hard task to forecast a major currency for 2012 let alone ours with no control over its own destiny! Good primary produce and Christchurch insurance funds will prop the currency up; demand for raw materials (when Christchurch rebuild starts) and global currency shocks will all push the dollar down.

The BMC’s advice would be to take cover on anything beyond the immediate as most of the currency swings this year will be prompted by events beyond the ability of our clients to foresee accurately.

Risk management
Every business should undergo a rigorous annual Risk Management Plan which
examines not just the things everyone expects but starts by establishing the key
Processes and Resources and then considers what might happen. This should produce a list of actions to eliminate, minimise or mitigate risk which the business can choose to accept or defer based on a cost-benefit analysis. This Operational Risk (the risk that something which worked yesterday will not function today) is considered separately from Strategic Risk – the subtle change in markets, value chains or other parts of the economic environment which affect the future health of the business.

Crisis management
The first few hours can save – or doom – a business. The BMC defines this as follows:
A Crisis is defined as an issue which has consequences beyond its direct ones
(especially as a result of human, reputational or capacity damage). It is usually major or catastrophic in consequence, time-critical and the eventual outcome can be considerably affected by actions taken immediately.
For some businesses – those whose staff (or customers) could be endangered by
product failure, time needs to be spent planning for the immediate consequences.

Sales planning
Sales has been aptly described as ‘The transfer of enthusiasm from the seller to the
buyer’ and now is an excellent time to dust off the list of lost clients, missed
opportunities and ‘what-ifs’ and take an acquisitive, imaginative approach to the year.

Plan sales campaigns, plan to revisit prospects you have not succeeded with and plan for an element of change in your current customers. Identify what is new or uplifting about your business and what it offers and make it a mission to transfer enthusiasm for that to everyone in your market place. 2012 is the year for being positive and your sales plan should reflect that.

Consider impact of regional powers having greater influence on markets
As more countries thrust their way onto the global trading stage, expect opportunities (and competition) – and alternatives (especially to European suppliers). Consider all the components of your value chain and look at the emerging economies to see what might be done (Indonesia is not that far away).

Market overview – adjacent opportunities
In conjunction with the above, look at the fringes of your markets – the related
products, similar customers, congruent processes – and try to identify options for
growth – or collaboration – for 2012 – and then pursue them.
There are lots of reasons to be optimistic – demand will return and despite a
couple of shocks 2012 will be a strong year. Be positive and be imaginative!

The bank may give you money but depending on how the loan is structured it could mean that you end up paying lots more $$$ in the banks interest instead of yours.

Are you aware of the different ways you can structure your loan which will enable you to pay it off more quickly and cheaper than the standard loan offered by most banks?

Do you really know enough about whether to buy in your own name, a Trust or a LTC (Look through Company)

Do you know what an LTC (Look through Company) actually is and how it is different from the previously used LAQC (Loss Attributing Qualifying Company)?

These questions impact dramatically on what is most probably one of the largest purchases you will make in your lifetime.

The reason for your purchase e.g. owner occupied property, residential investment or commercial, will mean that a different ownership structure is advisable

Another aspect to consider is that it is never good to have “all your eggs in one basket” so to speak. Its not just about borrowing ability but also about Asset protection therefore it pays to build up relationships with other funders and not just have everything with the one bank or non bank lender

It is worth working with a good broker who knows which lenders prefer what type of clients. Just like you, the borrower,  has particular preferences in regard to the type of home or investment property you’d like to purchase, so the banks have their preferences in regard to both property and borrower.

It usually does not cost to work with a broker and they can save you lots of money in the way the loan is structured plus save a lot of time running from one bank to the next.

Find out how the rich make their money by making their money work for them !

Let us help you grow your wealth by giving us some feedback and getting in touch with us.

Please choose 1 of the options below

A) Fill in the short application form to give a brief overview (takes approx 1min)

B) Fill in the Longer application form- Please note: The benefit of the full application is that we can focus our discussions around advice and tips and tricks that get you ahead.

C) If you’d rather talk to us personally then please contact us via any of the contact details below

*0508 4 Finance (0508 4 34626)

* 09 236 3398

* 021 520 617

We help source the right loan and take time to explain the various options available to you to best structure the mortgage in a way to save you $$$. We take that responsibility seriously and work as a go between with the client and bank or non bank funder.

This is serious stuff which can have long term implications on your financial future. Buying a property is a major decision whether it is your first home or investment property and we know you rely on our advise to help smooth this process. The whole process can be extremely stressful for both vendor and purchaser.

With a combination of extensive hands on experience in the finance and residential investment industries for over 30 years (the last 15+ years in finance and investment), our CEO, Tina Webb has much to contribute to help make the finance process easier for you.

As an investor herself she is very aware of the various challenges that investors face in sourcing finance. This includes development finance, property trading finance for those who may only need short term finance.

She continually up skills in regard to the various investment strategies and speaks at seminars covering topics like Lease Options and Double settlements for investment property. Tina is a registered financial advisor under the new legislation privacy page

The working knowledge within Homelink Finance enables us to offer constructive, time and money making/saving advice in your interest. We work with most major banks plus a number of non bank and private funding as well as some Building Societies

Let us help you move forward with your wealth creation in the most practical, cost effective way

Celebrate.

Love what you do.

Stop listening to the news about a recession.

                                                                                                                                                              Good Debt Bad Debt  

finance, mortgages

What will the changes be once The Reserve Bank Governor Alan Bollard leaves?

finance, mortgages

Crystal Ball gazing re the interest rates 

However, the rules relating to means testing for rest homes have not been brought into line with the gifting changes. These will still only recognise a gift to the amount of $27,000 per annum.

What does this mean for you? It means that if you have a $1,000,000 loan outstanding to your Trust, youare able to forgive the debt in one stroke. However, in regard to testing, this will be seen as a single $27,000 write-off which leaves the remaining $973,000 still seen as being your personal asset.

For Example
If your current age is 50 with $810,000 to gift

Option a. You could gift the whole $810,000 without attracting gift duty at age 50 which secures your assets. At age 80 circumstances have been such that you need to go into a rest home. Under the current rules $783,000 will stilll be seen as your personal asset since you gifted the lot in one hit.

Option b. Continue gifting at $27,000 p.a. and at age 80 you will not have any personal assets to be claimed against for rest home care (provided you have not added to personal assets)

It is possible that a change will be made to address this anomoly but until then it looks like it will be better to keep on gifting the $27,000 pa. If you are not sure how all this will affect you in relation to your personal circumstances the please seek professional advice, as always.

Depreciation – now every reason to claim and no reason not to! Over recent years a couple of things have held many investors back from claiming their full depreciation entitlement, and accountants from recommending it.

1. Uncertainty over what IRD would allow to be separated from the building such as electrical wiring and plumbing AND
2. The thought of having to repay a majority of the depreciation through depreciation recovery when selling.

BUT these two hurdles have been removed leaving very little downside to claiming your full depreciation entitlement.

Recent Changes summarised

Budget – May 2010

As was widely forecast the Government removed the ability for property investors to claim building depreciation in the Budget, commencing April 1 2011, whilst still allowing the depreciation on Chattels and Fit-out. The big benefit is that it removes the risk of being hit with a big depreciation recovery bill when you sell the property. In the past this has seen many investors claim little or no depreciation, but no longer. The chattels and fit-out can in most cases be proven to reduce in value and therefore recovery on these items will be removed or significantly reduced.

Interpretation Statement – April 2010

IRD released its Final Interpretation Statement on the “Tax treatment of Residential Rental property for Depreciation purposes”, finally clearing the confusion surrounding what IRD considers to be part of the building for depreciation purposes. While items such as plumbing, partitioning and electrical reticulation are considered part of the building, investors will be able to claim many “fit-out” items that are allowable, such as fences, air conditioning units and some decks along with the standard chattel items. With this confusion now clarified (10 years on!!!!!!), we are full steam ahead in regards to the separation of items considered to be chattels as well as items of fit-out.

What you need to do

For properties you have owned prior to April 1st 2011, that haven’t had a breakdown of their assets into the various IRD categories before that date, you will have no depreciation and there is nothing that can be done at this stage in regard to those properties.

Make sure for any properties purchased after April 1st 2011 that you obtain a depreciation apportionment so that you will be able to claim the depreciation applicable to that property.

People selling properties that have had chattel valuations completed in the past need to consider an exit report to help minimize depreciation recovery. The timeframe for this can be tight as we will need access to the property.

For those of you that have had a depreciation apportionment completed you need to ensure that items IRD considers to be part of the building, in line with the interpretation statement, are now being claimed as part of the building structure and that from 1 April 2011 the depreciation will need to be adjusted to 0%. To determine if items are considered to be part of the building we now have a three step process to follow but in most cases this will include partitions, electrical wiring, plumbing, plumbing fixtures, kitchen cabinets (fitted furniture), tiles, vinyl, garage doors, telecommunications cabling and some decks and canopies depending on the level of fixing to the building.

The three steps in summary are as follows;

Step 1: Determine whether the item is in some way attached or connected to the building. An item will not be considered attached for these purposes, if its only means of attachment is being plugged or wired into an electrical outlet (such as a freestanding oven), or attached to a water or gas outlet. If the item is attached to the building, go to step 2.

Step 2: Determine whether the item is an integral part of the residential rental property such that a residential rental property would be considered incomplete or unable to function without the item. If the item is not an integral part of the residential rental property, go to step 3.

Step 3: Determine whether the item is built-in or attached or connected to the building in such a way that it is part of the “fabric” of the building.

For future purchases after April 1st 2011

When buying a property in from 1 April 2011 make sure you take full advantage of your depreciation entitlements, it’s all about increasing cash-flow. The issues around depreciation recovery are now negligible and we have clarity from IRD around what can be separated from the buildings. Without an apportionment you will get NO depreciation.

Make the Most of every Opportunity!!

If selling an existing property have an exit report completed – this will minimize your depreciation recovery

Complete a Chattels valuation on those recent property purchases if you haven’t already – this will maximise your allowable depreciation claim.

For all future purchases ensure you get a depreciation apportionment completed, without it you will get no depreciation.

Remember those previous hurdles have now been removed.

 If you would like further information or have any questions feel free to visit their website www.valuit.co.nz or call us free on (0508) 482 583

Depreciation – now every reason to claim and no reason not to! Over recent years a couple of things have held many investors back from claiming their full depreciation entitlement, and accountants from recommending it.

1. Uncertainty over what IRD would allow to be separated from the building such as electrical wiring and plumbing AND
2. The thought of having to repay a majority of the depreciation through depreciation recovery when selling.

BUT these two hurdles have been removed leaving very little downside to claiming your full depreciation entitlement.

Recent Changes summarised

Budget – May 2010

As was widely forecast the Government removed the ability for property investors to claim building depreciation in the Budget, commencing April 1 2011, whilst still allowing the depreciation on Chattels and Fit-out. The big benefit is that it removes the risk of being hit with a big depreciation recovery bill when you sell the property. In the past this has seen many investors claim little or no depreciation, but no longer. The chattels and fit-out can in most cases be proven to reduce in value and therefore recovery on these items will be removed or significantly reduced.

Interpretation Statement – April 2010

IRD released its Final Interpretation Statement on the “Tax treatment of Residential Rental property for Depreciation purposes”, finally clearing the confusion surrounding what IRD considers to be part of the building for depreciation purposes. While items such as plumbing, partitioning and electrical reticulation are considered part of the building, investors will be able to claim many “fit-out” items that are allowable, such as fences, air conditioning units and some decks along with the standard chattel items. With this confusion now clarified (10 years on!!!!!!), we are full steam ahead in regards to the separation of items considered to be chattels as well as items of fit-out.

What you need to do

For properties you have owned prior to April 1st 2011, that haven’t had a breakdown of their assets into the various IRD categories before that date, you will have no depreciation and there is nothing that can be done at this stage in regard to those properties.

Make sure for any properties purchased after April 1st 2011 that you obtain a depreciation apportionment so that you will be able to claim the depreciation applicable to that property.

People selling properties that have had chattel valuations completed in the past need to consider an exit report to help minimize depreciation recovery. The timeframe for this can be tight as we will need access to the property.

For those of you that have had a depreciation apportionment completed you need to ensure that items IRD considers to be part of the building, in line with the interpretation statement, are now being claimed as part of the building structure and that from 1 April 2011 the depreciation will need to be adjusted to 0%. To determine if items are considered to be part of the building we now have a three step process to follow but in most cases this will include partitions, electrical wiring, plumbing, plumbing fixtures, kitchen cabinets (fitted furniture), tiles, vinyl, garage doors, telecommunications cabling and some decks and canopies depending on the level of fixing to the building.

The three steps in summary are as follows;

Step 1: Determine whether the item is in some way attached or connected to the building. An item will not be considered attached for these purposes, if its only means of attachment is being plugged or wired into an electrical outlet (such as a freestanding oven), or attached to a water or gas outlet. If the item is attached to the building, go to step 2.

Step 2: Determine whether the item is an integral part of the residential rental property such that a residential rental property would be considered incomplete or unable to function without the item. If the item is not an integral part of the residential rental property, go to step 3.

Step 3: Determine whether the item is built-in or attached or connected to the building in such a way that it is part of the “fabric” of the building.

For future purchases after April 1st 2011

When buying a property in from 1 April 2011 make sure you take full advantage of your depreciation entitlements, it’s all about increasing cash-flow. The issues around depreciation recovery are now negligible and we have clarity from IRD around what can be separated from the buildings. Without an apportionment you will get NO depreciation.

Make the Most of every Opportunity!!

If selling an existing property have an exit report completed – this will minimize your depreciation recovery

Complete a Chattels valuation on those recent property purchases if you haven’t already – this will maximise your allowable depreciation claim.

For all future purchases ensure you get a depreciation apportionment completed, without it you will get no depreciation.

Remember those previous hurdles have now been removed.

 If you would like further information or have any questions feel free to visit their website www.valuit.co.nz or call us free on (0508) 482 583

Written by Tony Thorne of Thorne Accounting prior to the changes to the LAQC company structure. (I highly recommend Tony who specializes in taxation for property investors)

Still Very worthwhile reading to  research the best investment structure for owning an investment property

Now that loss attributing qualifying companies (LAQC) will no longer exist after 31 March 2011, I have revisited various property ownership options to determine their advantages and disadvantages for property investors going forward so that you are armed with the information to make an informed decision about the best ownership structure for your rental properties.

Information to make a decision

 Before you can make a good decision about the best ownership option for your situation, you need to do three things:

1. Complete a projected profit and loss for your rental properties to determine the amount of profit or loss that the property will make.
2. Determine the expected taxable income of each investor.
3. Determine whether asset protection is more important to you than being able to offset any rental loss against your taxable income to get an immediate tax refund.

Once you have done those three things, you’re armed with the information to make a good decision.

 If purchasing a rental after 31 March 2011

Rental property making a profit

If your rental property will be making a profit, then I would generally recommend purchasing the property under a trust. As well as providing asset protection, a trust allows you to allocate the rental profit to a beneficiary that is on the lowest personal tax rate or to pay tax on the rental profit at the trust tax rate of 33%.

In this situation, the only disadvantage of the trust is the setup cost and ongoing compliance. If that is of concern to you, then owning the property in your personal name might suit you better.

It’s worth noting that as deprecation can no longer be claimed on buildings, it’s now more likely that a rental property will make a profit.

Rental property making a loss

If your rental property will be making a loss and you would rather have asset protection than an immediate tax refund, then I would generally recommend purchasing the property under a trust. In this situation, a trust will provide asset protection and the loss will be carried forward and accumulated under the trust until it begins to earn profits (probably from future rental profits when/if some of the loan on the property is paid off) which can then be offset against those losses.

If your rental property will be making a loss and you would rather an immediate tax refund than asset protection, then your options include a normal company, a lookthrough company (LTC) or personal ownership.

Normal Company

Using this option, the company would issue shares to the value of the purchase price of the rental property. You would borrow that same amount under your personal name and use those funds to purchase the shares in the company. The company would then purchase the property using those funds.

The company would end up with a rental property with no debt so would be making a profit. This profit would be paid to you as the shareholder by way of dividends. As the shares were purchased by you for the purpose of deriving dividends, the interest on the loan you drew down to purchase the shares will be tax deductible.

The advantage of this option is that any funds you loan to the company would be able to be refinanced at any stage in the future. However, this is not likely to ever happen as the company will be making a profit so you will not be required to ever loan funds to the company.

The disadvantages of this option is that it is complicated, the company will need to pay provisional tax, you would receive imputed dividends and you would need a liquidation to avoid paying tax on any capital gain (which is only a problem if your company owns more than one rental property). As the disadvantages outweigh the advantages, this option is not recommended in this situation.

LTC vs Personal Ownership

Now that we have discounted using a normal company, that leaves a LTC and personal ownership as the remaining two options.

The following is a comparison of the advantages and disadvantages to help you decide on whether to use an LTC or personal ownership.

Split of Rental Losses

Whether your rental property is owned by an LTC or under personal ownership, any loss will be included in your personal tax return. The only difference is to how that loss is split.

The losses of an LTC are distributed according to the number of shares each shareholder holds. The shares should generally be held by the person that earns the most income to allow the losses to be allocated to the person that will get the greatest tax benefit. As with most arrangements aimed at achieving a better tax result, there will always be questions over whether the IRD would challenge a shareholding split of other than 50/50 in the case of a husband and wife if all assets and funds are held 50/50.

However, the IRD have never questioned LAQC shareholding splits of other than 50/50 for a husband and wife in the past so there is no reason to expect them to challenge it under the LTC rules.

In contrast, the losses of a property personally owned are distributed based on the ownership of the property which may or may not result in the optimum tax outcome.

If a property was purchased by two people as a joint tenancy (which is often the case with married/de facto couples), then the IRD would expect any loss to be allocated 50/50 between those two people. If you wanted to depart from the typical 50/50 split then you must have a formal partnership agreement and have a valid reason for the different split (ie. contributing differing amounts of capital) rather than simply agreeing a different split because this achieves a better tax outcome. If a property was purchased by two or more people as tenants in common, then the ownership of the property can be done in unequal shares (ie. 75% to one person and 25% to the other). In this case, the IRD would expect any loss to be allocated 75/25 between those two people. However, case law suggests that the loss is not just split according to the registered owners of a property.

The other determining factors include who is liable for the mortgage and who contributes monetary funds towards the property. So, if a personally owned property is to be split 75/25, then the mortgage and contributions should also be split that way. While you can purchase a rental property under your personal name and have the loss allocated to achieve the best tax outcome, I believe this is achieved more easily with a LTC without as much doubt over the loss splitting ratio. An LTC also allows you to both be directors despite potentially having an imbalance in shareholding.

Loss Limitation Rule

The losses from an LTC are subject to the loss limitation rule whereas there are no  loss limitation rules for personal ownership.

The loss limitation rule effectively limits a shareholder’s claimable loss to the amount of their potential economic loss. The potential economic loss includes the cash introduced into the LTC and includes the extent of any security or personal guarantee provided towards the LTC loans. If a guarantee is provided by more than one person, then the amount of the guarantee must be divided between those people.

So, while the loss limitation rule is unlikely the effect the majority of LTC shareholders, there are situations where it will take effect. For example, if you and your son own a LTC as 50/50 shareholders but your son does not provide any cash, security or personal guarantees, then he may be unable to claim his entire share of the LTC loss.

Another example is where a husband and wife have a share split on 99/1 but the security and guarantee is provided from relationship property on a 50/50 basis. In this case, there is a higher possibility that the higher shareholder could have some losses limited.

Changing the Split of Rental Losses

Once you purchase a property under your personal names, if you want to change the split of the losses, it requires your lawyer to alter the certificate of title and is likely to require your bank to redraft documentation which means it a time consuming and expensive process.

A benefit of using a LTC is that you can change the split of rental losses by way of a share transfer which is easy and inexpensive. However, to avoid triggering a deemed sale of the underlying properties (and therefore depreciation recovered), the value of the shares transferred cannot be $50,000 more than the shareholders share of the net book value of the LTC net assets.

Limited Liability Protection

Under personal ownership, you are personally liable for all debts relating to the rental property. An LTC is a company so it provides limited liability protection against all creditors except your IRD income tax.

However, you are unlikely to be protected from your main creditor which will undoubtedly be your bank as you will generally be required to provide personal assets as security and to sign a personal guarantee anyway. So, a LTC really only provides protection if you were ever sued for damages caused to tenants by your property (ie. say by maintenance that was negligent) which is highly unlikely.

Accounting Costs of a LTC

The administration of a LTC is more involved and costs a bit extra. Our cost for incorporating a company, registering it with an IRD number and LTC election is $299 (incl gst). Annual minutes and annual returns must be prepared each year as part of complying with the Companies Act 1993.

The accounting costs involved with an LTC are greater due to the more complex tax rules and financial reporting requirements.

Our annual accounting costs for an LTC will generally be $200 more than personal ownership costs.

Living in your Rental Property

After a few years of renting out a property, I’ve seen investors who decide that they want to live in the rental property. The IRD consider it tax avoidance if you live in a property owned by a LTC so it’s best to transfer the property from the LTC at that time which is a time consuming and expensive process.

On the other hand, a property owned personally can easily go from being a rental property to an owner occupied property without causing any such problems (although there might be depreciation recovered at that time). So, personal ownership offers greatly flexibility in this area if there is a possibility that you may live in your rental property at some stage.

If the rental property you purchase will always be a rental property, then this won’t apply.

Recommendation

Whether you decide on an LTC or personal ownership depends on several factors. However, if your situation is fairly typical such as those facts described below, then I can provide some general guidance.

1. You are purchasing a rental property using a 80-100% bank loan obtained by providing an existing home as security
2. The rental property will make a tax loss given the high gearing of debt on the Property
3. Receiving a tax refund is more important to you than asset protection If you fit the assumptions above, I used to recommend using an LAQC. The main reason for this was the ability to get the LAQC to repay any funds you have loaned to it earlier and making the interest on those funds tax deductible. This is no longer a benefit under the LTC.

Now, there are only three benefits of a LTC.

The limited liability protection of a company although this is almost never required by residential property investors.

1. There is less doubt over the loss splitting ratio.
2. It’s easier to change the loss allocation than personal ownership although you still need to meet the $50,000 equity test.

If you are single, you will not need to change the loss allocation so personal ownership is best.

If you have a partner and need to split the loss in the most tax efficient manner then you could consider a LTC if you wanted to split the loss 99/1. Personal ownership with only one partner on the certificate of title and mortgage documents is another option to avoid the extra compliance costs of using a LTC.

You could also consider having a different loss split under a tenancy in common arrangement (ie. 75/25) while bearing in mind that the initial loans and on-going contributions should also be made those same proportions.

If your LAQC purchased a rental before 31 March 2011

If you have an existing LAQC that owns rental properties, then you need to decide whether your company should remain as a QC (ie. an LAQC that doesn’t attribute losses to shareholders) or whether your company should change to become a LTC from 1 April 2011. This generally depends on whether your rental property makes a profit or a loss and the top personal tax rate that you are on.

Rental property making a profit

If your rental property will be making a profit, then you have two options:

1. Do not elect for your LAQC to become a LTC so that it remains as a QC. The rental property profit will then be taxed at the company tax rate of 28%. If your personal tax rate is 33%, then this is likely to be a good option for you.
2. Elect for your LAQC to become a LTC. The rental property profit will then be taxed at your personal tax rate. If your personal tax rate is lower than the company tax rate of 28%, then this is likely to be a good option for you.

Rental property making a loss

If your rental property will be making a loss, your best option will probably be to elect for your LAQC to become a LTC. This election must be made before 30 September 2011 so that it is backdated and takes effect from 1 April 2011.

There are other options such as transferring your property into your personal name although this option involves legal fees and refinancing. In the majority of situations with a loss making rental, the LTC will be no different to your current LAQC so it’s not worth the time and cost involved to transfer your rental property into personal ownership.

However, the exception to this is where the loss limitation rule applies. The loss limitation rule effectively limits a shareholders claimable loss to the amount of their potential economic loss. The potential economic loss is the cash introduced into the LTC as well of the extent of any security or personal guarantee provided on the LTC loans.

So, while the loss limitation rule is unlikely the affect the majority of LTC shareholders, there are situations where it will take effect. For example, if you and your son own a LTC as 50/50 shareholders but your son does not provide any cash, security or personal guarantees, then it is unlikely he may be unable his entire share of the LTC loss. In this situation, you should consider transferring the property into personal ownership although this does come with legal costs and refinancing.

Another example is where a husband and wife have a share split on 99/1 but the security and guarantee is provided from relationship property on a 50/50 basis. In this case, there is a higher possibility that the higher shareholder could have some losses limited.

If you’ll be renting out your old family home after 31 March 2011

A common situation that often arises is a person purchasing a new family home and renting out their old family home. In the past, to achieve a better tax result, the old family home was often sold to a LAQC.

The LAQC would borrow enough funds to purchase the old family home and those funds were then used to reduce the debt on the new family home. The interest on the loan borrowed by the LAQC would be tax deductible as the LAQC was a separate tax entity that was purchasing the property. This was a common arrangement which the IRD had never questioned.

There is now confusion as to whether a LTC will be able to claim the interest on a loan that is used to purchase the old family home from 31 March 2011. This is because some tax advisors believe that as a LTC will no longer be a separate tax entity from yourself, you cannot sell a property to yourself. On the other hand, there are some tax advisors that believe that as the LTC is still a separate legal entity, then the transaction cannot be ignored for tax purposes.

It is pointless to debate which argument is more correct so myself and many other tax advisors have requested further clarification from the IRD as to what their interpretation of this will be. Until that interpretation is known, I will not be recommending using a LTC for the purchase of your old family home. Going forward, there are two alternative options.

If your old family home will be making a profit or only a small loss, then I would recommend purchasing the old family home under a trust. If you old family home will be making a loss and you would rather asset protection rather than an immediate tax refund, then I would also recommend purchasing the old family home under a trust. However, if your old family home will be making a loss and you would like an immediate tax refund, then the only option is to use a normal company.

Using this option, the company would issue shares to the value of the purchase price of the old family home. You would borrow that same amount under your personal name and use those funds to purchase those shares. The company would then purchase the old family home using those funds. The company would end up with the old family home with no debt so would be making a profit. This profit would be paid to you as the shareholder by way of dividends. As the shares were purchased by you for the purpose of deriving dividends, the interest on the loan you drew down to purchase the shares will be tax deductible.

The major advantage of this option in these circumstances is that the interest on your loan is tax deductible. For example, if the old family home was worth $400,000, this could mean a tax saving of $7,920 per year ($400k x 6% interest x 33% tax rate). The disadvantages of this option is that it is complicated, the company will need to pay provisional tax, you would receive imputed dividends and you would need a liquidation to avoid paying tax on any capital gain (which is only a problem if your company owns more than one rental property).

I think that the advantages could outweigh the disadvantages if you are looking to rent out your old family home so this is an option worth considering.

If your LAQC purchased your old family home or rental property before 31 March 2011

There is confusion as to whether a LAQC that transitions to become a LTC will be able to continue to claim the interest on a loan that was used to purchase the old family home prior to 1 April 2011. This is because some tax advisors believe that as a LTC will no longer be a separate tax entity from yourself, you cannot sell a property to yourself. On the other hand,

there are some tax advisors that believe that as the LTC is still a separate legal entity, then the transaction cannot be ignored for tax purposes.

It is pointless to debate which argument is more correct so myself and many other tax advisors have requested further clarification from the IRD as to what their interpretation of this will be. If the IRD agree to allow the interest to continue to be tax deductible, then there is no problem.

If the IRD disagree that the interest should continue to be tax deductible, then I have come up with the following options:

1. Do not elect for your LAQC to become a LTC so that it remains as a QC. This will mean that the interest will remain tax deductible. The advantage of this option is that it is very simple. The disadvantage of this option is that any loss will not be able to be offset against your personal income so you will not receive any tax refund for any loss. A decision on this option won’t need to be made until 30 September 2011 so it allows time until the IRD’s interpretation is known.
2.  Do not elect for your LAQC to become a LTC so that it remains as a QC and sell your rental property into your personal name so that you will be able to offset the loss against your personal income. The downside of this option is the depreciation recovered, legal fees and refinancing involved. It also ideally needs to be done before 31 March 2011 to avoid missing out on offsetting any losses against your income.

I recommend waiting until the IRD clarify this issue. However, a final decision will need to be made before 30 September 2011 if the IRD haven’t clarified their position by then. Then, if the IRD is not going to allow the interest to be tax deductible under the LTC, then we’ll need to implement option 1 if you’re not worried about the tax losses.

If you do want to access your tax losses, then you’d need to implement option 2. However, by waiting to implement option 2, it just means that you could potentially miss out on offsetting 6 months worth of tax losses against your income. If that doesn’t sit well with you then your best choice is to implement option 2 before 31 March 2011 prior to knowing what the IRD’s interpretation will be. It is also important to note that if you transferred a property into an LAQC that was previously a rental property, it would only be the interest on the additional borrowing drawn down at the time of that property transfer that would need clarification.

Conclusion

This guide is general in nature only. I strongly recommend getting advice from me

before making any decision.

THORNE ACCOUNTING Expert Property Accountants

Phone (09) 571 0491

Fax (09) 929 3019

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