Q

I have two properties, both of which I own jointly with my wife. The first is a rental purchased in August 2014: it has a current value of $600,000 and a remaining mortgage of $200,000. The second is our family home which was purchased in October 2013: it has a current value of $800,000 and is mortgage free.

We are planning to buy a new family home worth $1.1 million and then rent out our current home. Note that I am the main income earner as my wife looks after the kids. My offer has been accepted but I am wondering if I should set up a look-through company (LTC), with 100% shares in my name, and purchase the two properties which would free up equity to buy the new home jointly with my wife?

If so, do I need to set the company up now when the agreement becomes unconditional or at the settlement date – ie: do I have time to get more advice before the settlement date? Do you see ring-fencing going ahead and how should this impact my decision? I was thinking of setting it up as interest only but I’m not sure if this makes sense with ring-fencing.

A

Subject to a couple of provisos, you are right to think you are best served transferring your existing two properties into an LTC when buying your new home. Transferring the properties to the LTC and acquiring the new home in a trust (ideally) works well from both asset protection and tax perspectives. You sell the two properties at the total market value of $1.4 million and the LTC is borrower on both the existing $200,000 bank debt and the $1.1 million required to buy the new home. You do not need to set the company up prior to going unconditional but should set up well in advance of settlement.

Now the provisos. The sale of the properties into the company can trigger income tax consequences if the properties have been tainted through past property dealing activity, subdivision, development, or even rezoning. These issues need to be examined before you transfer them into the company. Additionally, the company then acquires the properties afresh, meaning there is a reset five-year brightline period for the two existing properties (ie: if the company sells within five years you would have a taxable sale). I see ring-fencing going ahead from April 1, 2019, but it would not dissuade me from recommending the above. Although you may not derive the same benefit in a ring-fencing environment, you still get benefits from asset protection and tax perspectives. There are further intricacies in terms of splitting your borrowing between two banks, which I’m unable to address here. For that, you should seek specific advice.

- Matthew Gilligan

Invest Or Pay Mortgage

Q

My wife and I were lucky enough to ride the wave in the very buoyant Bay of Plenty property market a few years back with a couple of units. We ended up cashing in and bought our forever home. It has a CV of $1.2 million and our debt is $350,000. Since then we have been treading water as we have a new baby But now she is back at work and more money is coming in.

I know the likelihood of there being another boom, similar to the recent one, in the foreseeable future is slim. So my question to you is would you recommend that we increase our payments on our current mortgage or look to invest? We have been approved up to $600,000 to buy and have enough money coming in to pay our mortgage and help top up another.

A

Personally, I believe investment used correctly will take you further than straight debt reduction will. However, there are a lot of factors to take into consideration in order to make sure that is the right call for you. There are also variables here. I would argue that in most parts of New Zealand’s property market you are better repaying a debt over purchasing a property at a complete retail price - but that’s where buying well is key.

At present there are a lot of opportunities to buy properties well under market value. When looking at net worth it is worth noting that the immediate equity that can be picked up at purchase level in the current market can equate to a number of years paying principal down. It is going to be a solution which needs to relate to your personal position. However, I believe that if handled correctly in most cases the investor will win over the debt reducer in this situation.

- Kris Pedersen

Minor Dwelling Request

Q

My tenant has asked me whether she can put a cabin in the driveway for six months for her brother who is trying to find somewhere closer to her to live but with no luck. The cabin is portable so it will need to connect to the house for power and so on.

I don’t think it’s a good idea as they already have six people living in the house. Plus it’s a quiet neighbourhood. They also want to add a gate to the fence to keep their kids inside. So I want to say no but in a nice way.

Any suggestions?

A

If you consider that the addition of a cabin in the driveway is undesirable for any reason, it’s best to tell your tenants the truth. It may be aesthetically unacceptable, or it may be that the six months might drag on to a longer term, or there may be a number of reasons that make you uncomfortable.

The tenants may be fine, but it is a different story to have another occupant come in and live in a separate accommodation. Have you referencechecked the brother to see if he fits your desired tenant profile? In the final analysis, the decision is yours. If you don’t think it’s a good idea, decline the request.

- Bernard Parker

Structure Around Main Use

Q

If you consider that the addition of a cabin in the driveway is undesirable for any reason, it’s best to tell your tenants the truth. It may be aesthetically unacceptable, or it may be that the six months might drag on to a longer term, or there may be a number of reasons that make you uncomfortable. The tenants may be fine, but it is a different story to have another occupant come in and live in a separate accommodation. Have you referencechecked the brother to see if he fits your desired tenant profile? In the final analysis, the decision is yours. If you don’t think it’s a good idea, decline the request. - Bernard ParkerMy husband and I bought our first investment property and set up an LTC about two years ago. We are in the process of buying another investment property. But it’s really lovely so we are considering actually living in it and selling our family home to buy another investment. (Our current family home would not be a good rental.)

My question is: should we purchase as the LTC or in our personal names? How easy is it to switch from one to the other once we decide?

A

My view would be to plan the structuring around the predominant use of the property. If it will be your home, plan accordingly. If you need to alter ownership it is costly with lawyers and re-documentations of bank lending.

Further, it also triggers the bright line test as transfers between associated parties are captured without exemption. That means that any gain derived during the period of ownership in the LTC would be taxable when the company sells the property to you. I’d suggest leaving the lending on the new home floating so this debt can be repaid out of the proceeds of the sale of the family home.

- Mark Withers

Rent Arrears Under Insolvency

Q

We have a tenant who is under a court order to repay us outstanding rent arrears of nearly $10,000. We obtained a court order late last year to enable us to immediately evict the tenant if she fails to pay any future rental payments and the tenant was ordered to pay off the debt at $400 per month. But our tenant has just made herself insolvent and now says the court order is null and void. How do we proceed?

A

From what you have said, the Tribunal has allowed for the eviction of the tenant should the tenant fall behind in paying their rent. Should this be the case, procedures on how to apply for an eviction warrant can be found in the “about civil debt” section on the Ministry of Justice website.

Your situation regarding collection of the outstanding rent arrears is covered under insolvency law. So I have asked our colleagues in the Insolvency and Trustee Service for some guidance in responding to that part of your question. When a person enters a formal insolvency procedure, creditors must stop all proceedings to collect their debts. This includes any court orders. As a creditor you can file a claim in the person’s insolvency. This can be done online at www.insolvency.govt.nz.

Once this is done, you will be able to see any progress in the person’s insolvency through the website. The likelihood of any debt repayment will depend on which type of insolvency that is in place. As the Official Assignee realises funds from the sale of the person’s property or any contributions that the person is required to pay, the creditors will receive dividends.

Unfortunately, creditors are seldom paid in full. In the case of a No Asset Procedure, if there is no property to be sold or means to make contribution, the creditors will not receive anything. Along with filing a claim, the insolvency website has explanations of insolvency procedures (bankruptcy, no asset procedures, summary instalment orders) and what they entail. Go to www. insolvency.govt.nz for more information.

- Jennifer Sykes