Should we restructure into an LAQC?

Question from Michelle updated on 24th September 2009:

Hello, we have a rental property which is about to start paying an income and is currently paying principal & interest and we have a healthy equity in it also. My question is should we put the property on interest only and finance it up to nearly 100% and transfer the equity off our own homes mortgage? I'm nervous about running at 100% but that is what we have been advised to do as well as set up a LAQC. Our goal is to pay off our homes mortgage which is has 50% equity and have one or more rental properties to top up the pension in our later years. P.S we are only in our 30'S.

Our expert Mark Withers responded:

A general principal of good tax management is to retire personal debt in priority over your deductible investment debt. Restructuring the investment property into an LAQC that borrows interest only money to buy the property may be one way to achieve this. You must be careful though as any transaction or arrangement that is entered into to avoid the incidence of tax as it's primary motivator is illegal tax avoidance.

It is a fine line between tax efficient restructuring and illegal tax avoidance. It is more likely to be problematic if the owners of the LAQC are the same as the properties owners now. If there are other non-tax driven reasons for the restructure it is more likely to stand scrutiny. For example, if your home was restructured into a trust at the same time then the rental property sale to the LAQC would simply be a by product of a greater overall estate planning exercise.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

 

 

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