BEST OWNERSHIP STRUCTURES FOR INVESTMENT PROPERTY

Best ownership structures for Investment Property – what are they? This is an excerpt from Diana Clement‘s regular series in the NZ Herald.*

‘Ownership of LTCs can be tweaked according to the income and tax rate of the couple or partners involved. Where the property is making a profit, for example, says accountant Garreth Collard, of EpsomTax.com, the majority shareholder of the LTC could be a spouse who is in the lowest tax bracket. This is ideal where that person is on the 17.5 percent tax bracket or lower. It’s a good idea to involve an accountant and lawyer in setting up the LTC so you don’t risk being accused of tax avoidance in the future. Nine times out of 10, argues Collard, an LTC is the best structure for owning a rental property: “You have the benefit of limited liability, a legal structure that is clearly a separate entity yet under your control, and yet it is treated at tax time like a partnership: the best of both worlds.”‘

Investing in property is a popular wealth-building strategy in New Zealand, but choosing the right ownership structure is crucial to maximise returns, manage tax obligations, and protect your assets. Whether you’re a seasoned investor or just starting out, understanding the pros and cons of different ownership structures can help you make informed decisions.

In this guide, we explore the most effective ownership structures for investment property, including Look-Through Companies (LTCs), trusts, partnerships, and standard companies. We’ll also highlight key considerations such as tax efficiency, asset protection, and compliance.

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Why Ownership Structure Matters

The way you structure your property ownership affects:

• Tax treatment of income and losses
• Asset protection from creditors or legal claims
• Estate planning and succession
• Flexibility in profit distribution
• Compliance with IRD regulations

Choosing the wrong structure can lead to unnecessary tax, legal complications, or missed opportunities. That’s why it’s essential to consult both an accountant and a lawyer before setting up your investment entity.

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Look-Through Companies (LTCs): The Most Popular Choice

Nine times out of ten, a Look-Through Company (LTC) is the best structure for owning a rental property. LTCs offer a unique blend of benefits:

• Limited liability: Protects personal assets from business risks.
• Transparent tax treatment: Income and losses flow through to shareholders, similar to a partnership.
• Control and flexibility: You retain control while benefiting from a separate legal entity.

How LTCs Work

An LTC is a company for legal purposes but is treated like a partnership for tax purposes. This means:

• Profits and losses are distributed to shareholders based on their shareholding.
• The company itself does not pay income tax.
• Shareholders declare their portion of income or loss on their personal tax returns.

For example, if an LTC earns a profit of $10,000 and you own 50% of the shares, you declare $5,000 as income. If the LTC incurs a loss, you declare your share of the loss.

Tax Efficiency with LTCs

LTCs allow strategic tax planning. If one partner is in a lower tax bracket, they can hold a larger share of the LTC to reduce overall tax liability. For instance, if your spouse is in the 17.5% tax bracket, allocating more shares to them can result in significant savings.

However, be cautious: changing shareholdings can trigger Bright-line Rule resets and may raise tax avoidance concerns. Always seek professional advice before making changes.

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Trusts: Ideal for Asset Protection and Estate Planning

Trusts are another common structure for property investment, especially for those focused on long-term asset protection and succession planning.

Key Benefits of Trusts

• Asset protection: Assets held in a trust are generally protected from personal creditors.
• Estate planning: Trusts allow for smooth transfer of assets to beneficiaries.
• Tax flexibility: Profits can be distributed to beneficiaries in lower tax brackets.

Limitations

• Trusts cannot distribute losses.
• They require careful administration and compliance.
• IRD scrutiny is increasing, so proper documentation is essential.

Trusts are best suited for investors with significant assets or those looking to protect family wealth across generations.

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Partnerships: Simple but Risky

Partnerships are straightforward and cost-effective but come with notable risks.

Pros

• Easy to set up and manage.
• Income and losses flow directly to partners.

Cons

• No limited liability—partners are personally liable for debts.
• Disputes can arise over profit sharing and decision-making.
• Less flexibility compared to LTCs or trusts.

Partnerships may suit small-scale investors or family arrangements but are generally not recommended for larger portfolios.

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Standard Companies: Flat Tax Rate Advantage

Standard limited liability companies can be effective for high-income investors whose properties generate consistent profits.

Advantages

• Profits taxed at a flat rate of 28%, potentially lower than personal tax rates.
• Limited liability protection.
• Clear legal structure.

Drawbacks

• Losses are trapped within the company and cannot be offset against personal income.
• Less flexibility in profit distribution compared to LTCs.

If your property is consistently profitable and you’re in a high tax bracket, a standard company may offer tax savings. But if your property runs at a loss, this structure could be inefficient.

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Comparing the Structures

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Common Mistakes to Avoid

1. Ignoring tax implications: Each structure has different tax consequences.
2. Changing shareholdings without advice: Can trigger Bright-line resets and tax issues.
3. Poor documentation: Especially with trusts, lack of records can lead to IRD penalties.
4. Choosing based on cost alone: Cheap setups can be costly in the long run.

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When to Review Your Structure

Your ownership structure should evolve with your circumstances. Consider reviewing it when:

• Your income changes significantly.
• You acquire more properties.
• You plan to sell or transfer ownership.
• Tax laws change.

Regular reviews with your accountant and lawyer ensure your structure remains optimal.

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Final Thoughts

There’s no one-size-fits-all answer to the best ownership structure for investment property. LTCs are often the most versatile and tax-efficient option, but trusts, partnerships, and companies each have their place depending on your goals.

Before making a decision, consult professionals who understand property investment and tax law. A well-chosen structure can save you thousands in tax, protect your assets, and simplify your financial future.

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Need Help Choosing the Right Structure?

At EpsomTax.com, we specialise in helping property investors set up the right ownership structure. Whether you’re buying your first rental or expanding your portfolio, we’ll guide you through the process with expert advice tailored to your situation.

📞  Contact us today to book a consultation or explore our resources on LTCs, trusts, and more.

More information here; see also this video about LTCs; see also this article on LTCs vs QCs and LAQCs, or this article on the merits of trusts vs LTCs; check out the FAQ page!

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