The best choice for most property investors is "tenants in common", says Whitburn. With this style of ownership the shares in the property can, if wanted, be split unevenly between the couple or friends who are buying to reflect the percentage they have contributed or for tax reasons.
The other big advantage of "tenants in common" is that the profits or losses can be split according to the percentage of ownership and are declared to the IRD via the owner's individual IR3 tax return.
The tenants in common ownership structure also allows the joint owners to change the ownership shares. If, for example, one wants to sell part or all of their holding, the ownership percentages can be adjusted accordingly.
Shares in a property held in a joint tenancy can be a little trickier. Neither person in a joint tenancy owns a defined share. If one of the owners dies the shares go automatically to the other partner, which may not be what they envisioned happening. In the case of tenants in common, survivorship clauses in the agreement mean that the shares pass to the deceased person's will, says Whitburn.
More often than not, investors prefer structures other than individual ownership. That may be a simple partnership. More commonly, however, lawyers and accountants recommend either LTCs (or occasionally LLPs).
Many accountants and lawyers recommend LTCs, says Whitburn, because they allow losses to flow through to the shareholder's individual tax returns. That means they can claim losses from a rental property against tax paid on their day job. In Auckland in particular, it's nigh impossible to buy a property currently where the yield is high enough for the owners to make a profit on the rent alone. Many buyers factor the tax benefits from their rental losses into their overall equation.
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 will be a spouse who is in the lowest tax bracket. This is ideal where that person is on the 17.5 per cent tax bracket or lower."
It's a good idea to involve an accountant and lawyer in the 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."
The downside of a LTC, says Whitburn is that it's ripe for political tinkering. At the last election the Labour Party proposed ring-fencing property losses so they couldn't flow through LTCs to individuals' own tax returns. There is no guarantee this won't happen in the future.
The other reasonably common option, says Whitburn for ownership of rental properties is the family trust. Trusts provide far more protection of the investment property against creditors, marital splits, and rest home fees. The big "but", however, is that losses are ring-fenced, meaning they can't be claimed against tax from an individual's day job. They can only be carried forward against future profits.
Whitburn uses LLPs for developments. LLPs are separate legal personalities, which limits any liability to the individual owners. The profits or losses they make flow through to the partners in the proportion to their ownership.
LLPs and LTCs have to file a separate IR7 and have more set-up and administration costs than a sole trader who registers the property in private names.
Whitburn concludes, however, that property investors should be aiming to make a profit on an on-going basis, not just buying on the hope of future capital gain.
