OFFSET LTC PROFITS OR LOSSES AGAINST OTHER RENTALS

Can you offset LTC profits or losses against other rentals? Is it possible? Is it a good idea still?

Well, they are good questions. Inland Revenue released a Tax Information Bulletin (TIB) in September 2019, which clarified this matter.

For the purposes of this blog post, we are going to assume that the LTC or an individual only holds residential rental property i.e. no commercial, they are not a trader or an associated person or a developer etc.

CAN RENTAL LOSS FROM YOUR LTC BE OFFSET AGAINST INCOME FROM RENTALS OWNED IN ANOTHER ENTITY?

For example, let’s say you have a LTC with residential rental property. It runs at a loss. You and your spouse are the shareholders, so the loss gets distributed to you on your IR3 personal tax returns. You also own a rental jointly in your own names (a partnership). It makes money because the rental income is more than the expenses.

So, can you offset LTC profits or losses against other rentals?

The answer is “maybe.” Even “probably.” However, it depends on whether:

1. the LTC decides to apply the ring-fencing rules on a portfolio basis or on a property-by-property basis.
2. the shareholders have any other residential rentals with income/loss to offset against this

However, the answer is essentially, “Yes”, if:

1. you have decided to use a portfolio basis for the LTC (that is spread the losses and profits out between the various properties owned by the LTC) 
2. you have at least one residential rental property held in your own name or in a standard partnership i.e. we are not commenting on “limited partnerships” here

So the result is, you can have a negatively-geared LTC, and given the above points, the losses can flow through to you as a shareholder. You can then offset this against profits from a personally-owned rental (either solely owned or in a partnership). The situation also works in reverse ie there are profits in the LTC and losses in the personal/partnership rental.

Note that you can’t offset any losses against income from other sources e.g. wages, like you used to in the good old days. That is what the concept of “ring-fencing of losses” means. The losses are “ring-fenced” so that they only apply to residential rental property.

SOME INTERESTING POINTS

• If an LTC applies the rules on a property-by-property basis, the shareholders have to also take that approach in their returns. If it applies the rules on a portfolio basis, ditto.
• This is not the case for partners in partnerships. If a partnership has filed a partnership return applying the rules on a particular basis, the partners do not necessarily need to apply the rules on that same basis. So a partnership now gives much more flexibility than the LTC in this one respect.

IS IT STILL A GOOD IDEA TO RESTRUCTURE?

​Let’s give an example. Say you bought a house to live in, and your rental was owned by you and your spouse. In the good old days, we would set up an LTC for you, it would buy the rental off you, and you would end up with a big mortgage on the rental – all the interest tax-deductible – and a small mortgage on your new residence.

Do restructure strategies such as selling your old family home to an LTC still work?
No. We have previously recommended this, in blog posts such as this one. But the announcements in March 2021 about interest deductibility threw that all out the window. In a scenario such as our example above, you are no better off, because the LTC cannot claim the interest deductions. If anything, you might be worse off. So please, contact us first so we can advise specifically on your situation. Call 099730706 or email us here

tib-vol31-no8.pdf

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