TRUST VS LTC FOR RESIDENTIAL INVESTMENT PROPERTY

Trust vs LTC for residential investment property is a question almost every serious NZ property investor eventually asks their accountant. The honest answer is: it depends — mainly on whether the property makes a profit or a loss, and on the tax position of each owner. This guide walks through both scenarios, updates the numbers for the current 33%-39% trustee tax rate, and gives you a clear framework for choosing between a trust and an LTC before you buy.

30-Second Read

• LTCs let profits and losses flow through to shareholders; trusts generally only pass profits through to beneficiaries, not losses.
• Since 1 April 2024, trustee income over $10,000 is taxed at 39%, well above the 28% company rate — a bigger gap than the old 33% trustee rate created.
• If your rental runs at a loss, an LTC usually beats a trust, because you can allocate that loss to the shareholder best placed to use it.
• If your rental turns a profit and one owner sits on a lower tax bracket, both an LTC and a trust can route income to that person — but each comes with different compliance and asset-protection trade-offs.
• The right structure depends on gearing, each owner’s income, and how much you value asset protection versus tax efficiency and simplicity.

We work through both negative and positive gearing scenarios below, plus two worked examples, before giving our recommendation.

Negative Gearing: Why LTCs Usually Win

When a rental property loses money, structure matters most. An LTC lets that loss flow straight through to the shareholders, who can then offset it against their other income — subject, of course, to the residential property deduction (ring-fencing) rules(opens in new tab), which limit how rental losses can be used against other income streams.

A trust works very differently. Inland Revenue is clear(opens in new tab) that a trust cannot pass a tax loss on to beneficiaries except in limited circumstances. If your trust’s rental expenses exceed its rental income, that loss generally stays locked inside the trust, waiting to offset future trust profit — it doesn’t help your personal tax position in the meantime.

On top of that, trustee income is taxed more heavily than company income. Since 1 April 2024, trustee income over $10,000 attracts a 39% tax rate, compared with the flat 28% company rate an LTC’s non-look-through profit would otherwise sit alongside. That’s a wider gap than investors may remember from a few years ago, when the trustee rate sat at 33%.

Worked Example — Negative Gearing

Priya and Anish buy a rental property that runs at a loss in its first two years, after interest, insurance and maintenance costs. They already earn solid salaries and want to use that loss to reduce their overall tax bill as much as the ring-fencing rules allow. Because they hold the property through an LTC, the loss flows through to them as shareholders in proportion to their ownership, and they can carry forward any amount the ring-fencing rules restrict. If Priya and Anish held the same property in a trust instead, that loss would stay trapped in the trust — of no use to their personal tax position until the property eventually turns a profit.

Our recommendation still depends on the full picture: your financial plan, how heavily geared the property is, and each owner’s personal income all shape which structure actually suits you best.

Positive Gearing: A More Even Contest

Once a rental property turns a profit, the key question becomes: what tax bracket do the owners sit in? You can check current thresholds on Inland Revenue’s individual tax rates page(opens in new tab).

If an owner earns close to or above the top personal threshold, every extra dollar of rental profit gets taxed at that top rate. In that situation, three main structuring options come up:

1. An LTC, with the majority shareholding sitting with a spouse or partner on a lower tax bracket. If that partner earns roughly $35,000–$38,000 a year, an extra $10,000–$13,000 of rental income can land in a lower tax bracket rather than the top one.
2. A trust, distributing income to a lower-earning spouse or partner as beneficiary income, taxed at their personal marginal rate rather than a 39% trustee rate.
3. A standard company, paying the flat 28% company rate on the rental profit, with no look-through to shareholders.

Some investors combine an LTC with a trust — using the trust to hold a look-through interest in the LTC — mainly for asset protection. In practice, banks often require personal guarantees from the trustees anyway, which can undercut much of that protection.

Option 3 carries one real drawback: drawing funds out of a standard company (for example, to pay down your own mortgage) counts as personal income and gets taxed accordingly, though this does reduce the company’s own tax bill correspondingly.

Worked Example — Positive Gearing

Mark and Louise’s rental property comfortably turns a profit each year. Mark earns close to the top tax threshold; Louise works part-time and earns around $37,000 a year. They set up an LTC with Louise holding the majority shareholding, so most of the rental profit lands in her lower tax bracket instead of Mark’s top one. If Louise’s income later climbs past $53,500 this advantage narrows quickly. At that point, a standard company paying the flat 28% rate becomes the more efficient option – although there is just 2% in it.

The Conclusion

In most cases, an LTC gives residential property investors the best structure for a rental property — though not always. The pattern we see most often: investors hold their own home in a trust for asset protection, and hold their residential rental property through an LTC to keep the tax treatment flexible. (Our article on using an LTC for a rental property covers this pairing in more detail.)

The right answer still comes down to getting the most out of whichever legal structure you choose, and understanding exactly what job that structure needs to do. Before you set up a trust, get advice from a solicitor experienced in residential investment property. Before you commit to any structure, do your homework on the investment itself — a qualified financial adviser can help here — and talk to a property accountant who deals with these structures every day.

Do You Need a Trust or an LTC?

Use this as a starting point before you talk to your accountant.

Is the property likely to run at a loss? → An LTC usually lets you use that loss more effectively than a trust.

Is the property turning a profit, with one owner on a much lower tax bracket? → Both an LTC and a trust can help — compare the numbers for your situation.

Is asset protection your main driver? → A trust may suit you better, though banks may still require personal guarantees.

Do you already hold your home in a trust? → Many investors pair that with an LTC for their rental property.

Summary

Trust vs LTC for residential investment property comes down to two things: whether the property is negatively or positively geared, and where each owner sits on the tax scale. For a negatively-geared property, an LTC almost always beats a trust, because trusts generally can’t pass losses through to beneficiaries and now face a 33%-39% tax rate on retained income. For a positively-geared property, the contest is closer — an LTC, a trust or even a standard company can each make sense, depending on each owner’s income and how much weight you put on asset protection versus tax efficiency. There’s no single right answer for every investor; the right structure depends on your gearing, your income mix, and your long-term plans for the property.

Talk to EpsomTax.com Before You Decide

Getting your ownership structure wrong can cost you thousands in avoidable tax and years of unnecessary compliance. Before you set up a trust or an LTC for your next residential investment property, get advice tailored to your gearing, your income, and your long-term goals.

Contact EpsomTax.com to work through whether a trust, an LTC or a standard company is the right fit for your rental property. We work with New Zealand property investors every day and can help you structure your next purchase correctly from day one.