We often get asked what rental property trading structures are best for rental property investors, and like most things, it depends on your situation and what your plans are.
Check out our high level explanation of the most common structures below and feel free to get in touch if you need more info;
To privately own your rental property basically is when you go out and purchase and own it under your own name. All rents received and expenses are declared in your personal tax return. There’s no “official” setup or registration required other than buying the property in your own name.
Going with privately owned is a good choice in that it’s easy and inexpensive to get started and there’s only one owner involved.
Joint ownership is exactly the same as private ownership but more than one person owns the property. All rents received and expenses are split equally and declared in each owner’s personal tax returns. It’s a good option when there’s more than one owner and both owners earn about the same amount from salary, wages and other sources. Again there’s no “official” setup or registration required other than buying the property in your joint names.
A Partnership is very similar to Joint Ownership but a Partnership requires an inexpensive registration with Inland Revenue and has its own IRD number and requires its own income tax return to be prepared each year as well as the partner’s returns. There’s not really any tax advantages over Joint Ownership and it costs a bit more to administer. Here’s what IRD says about partnerships.
Limited Liability Partnership
These structures are designed more for large investment ventures than residential rental property ownership. At this time there’s not really any advantage for a small property investor to use a Limited Liability Partnership as an ownership structure in comparison to other available ownership options but we’ll keep an eye on these over time for any changes. The New Zealand Companies office explains a bit more here.
Limited Liability Company / LTC
A Limited Liability Company is a separate legal entity and the owners are the shareholders of the company. The company will own the property and be assigned any mortgage directly and you and (optionally) others as shareholders own the company.
The basis of an LTC (Look Through Company) is that all profits and losses generated will flow through to the individual shareholders based on their shareholding percentage and included in their personal income tax returns.
A Limited Liability Company trades with its own IRD number and requires its own income tax return to be prepared each year as well as the shareholder’s returns.
Limited Liability Companies do cost a few hundred dollars to setup and a little more to administer but this is may be worth the extra cost for any benefits offered which include the possibility of better tax results than joint ownership or a partnership.
Trusts can be good for asset protection should things not work out but are expensive to setup, administer and have limited tax benefits relating to using losses to a personal advantage. They can be challenged for validity which may result in having no asset protection benefits at all and presently company tax rates are lower than those for a Trust.
It’s is reasonably common for rental property to be in a Trust especially where the owners want good long term asset protection however there’s no personal tax advantages to be gained when compared to the other options. It really depends on what you’re after. Want assets protected well? Go for a trust. Looking for tax benefits? Another structure would be more effective and cost less. If you do want to own property in a Trust you’ll need it set up by a good lawyer who specialises in doing this.
But please keep in mind
The main thing is to select the best structure which suits your needs and makes the best use of any tax advantages where possible. You really should seek advice regarding your new rental property from professionals before going much further. Kiwitax can help, you can get a quote in just two minutes here.
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