Rental Property Trading Structures
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. It’s also a good option if your rental property is likely to make a loss for the next few years as the losses can be offset against any wages, salary, business or other income earned.
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 costs a bit more to administer.
Limited Liability Partnership
These are very new and were 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.
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.
A Look Through Company (LTC) is a new company available from 1 April 2011 onwards. The basis of an LTC 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. Please note that there are loss limitation rules that do apply to this.
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 refunds than joint ownership or a partnership.
Trusts are 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 tax man usually ensures you’ll pay quite a bit of tax if you’re profitable. 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 property from professionals before going much further.