Q

We currently have four investment properties all purchased within the last few years, so they are all under the five year bright-line test. They were all purchased jointly and in our personal names, not a look-through company (LTC).

We are wondering if we should have initially set up an LTC and what are the benefits of this? We are planning on purchasing more investment properties, so would it be of benefit to still create an LTC for this purpose?

On another note: We have a revolving credit facility secured against our house; if we use funds from this to pay a deposit on an investment property, is this interest tax deductible or rather can it be used to offset the rental income on the property?

A

Great care must be taken when altering property ownership now. A sale of LTC shares or a transfer of the properties from you to an LTC are both trigger events for the bright-line rules. It’s also important to recognise that the outcome under an LTC structure is likely to be essentially the same as a partnership, because both structures flow profits and losses to shareholders or partners, subject of course to residential loss ring-fencing. I would therefore question the need to alter the arrangement unless there is some specific advantage you are chasing from the restructure. An LTC is often used as a restructuring tool if, for example, you are transferring a private home to it and changing it to a rental.

Re your second question, yes, if you can clearly identify the interest cost from using your line of credit to fund a property deposit this interest will be deductible against rent. I would suggest though, that you establish a new facility that allows your deposit to be reimbursed on settlement as the business/private nature of lines of credit can make them very messy to determine deductibility on an ongoing basis. - Mark Withers

Tax Deductible Development

Q

I am currently building a 100m2 three-bedroom minor dwelling on an 812m2 section with an existing 200m2 house. Without the new building, the latest council land value is $325,000 and the improvement is $245,000 for a total capital value of $570,000. I still have a current mortgage on the existing house and section of about $200,000. I have taken on another mortgage to build the new dwelling - about $370,000. My question is based on the current valuation and the usage to the minor dwelling, which is about one third. Can I claim one third of the existing mortgage interest as tax deductible? If not, what portion of the existing mortgage interest is tax deductible because it is also paying for the section?

A

You are right that a portion of the existing mortgage relates to the land that you will be building the minor dwelling on. This means you need to arrive at a reasonable estimate for what proportion of the original purchase price related to the land that is going to be used for rental purposes. One way of doing that may be to compare the relative sizes of the dwellings as you have done. Other means are to get a valuation or look at the relative sizes of the land that each dwelling will effectively occupy.

In order to work out what proportion of the original purchase price related to the land only, you can use the split between the land and improvement values on the latest council valuation which shows that the land value comprises 57% of the total value of the property. If you were to then say that one third of the land is dedicated to rental use, this will therefore mean 19% of the original total purchase price related to the land which is going to be applied towards rental use. This means 19% of the interest on the $200,000 of existing borrowing would be deductible. On the other hand, as you are likely aware, all of the interest on the $370,000 of borrowing that you undertake to build the new dwelling will be deductible.

It is possible that your affairs may be able to be structured more effectively than this from a tax perspective. However, this is a more in-depth discussion that would require consideration of your specific circumstances and I suggest you get specialist advice in this regard. - Matthew Gilligan

Tenants’ Rights

Q

We paid a bond when we moved into a property, but we didn’t receive a receipt and didn’t sign a lodgment form, so I don’t think it was lodged. We also paid for the electricity for a shop adjoining the house, leased by a third party. Was this legal? It was not documented as a condition in our tenancy agreement.

We ended our tenancy two months ago. As we had a dog on the property, we chose to get the carpets commercially cleaned. After we had moved out of the property we received a message from our landlord commenting on how clean the house was left and how good it smelled. They have been unable to secure new tenants and have now said they will not be refunding our bond citing “overwhelming dog smell”, carpet cleaning costs and lack of rent income as reasons. What are our rights in this situation?

A

There are several issues here. Firstly, the landlord should have given you a receipt for the bond. Secondly, the landlord is required to lodge the bond with the Tenancy Services bond centre. You can phone the Bond Centre and verify that there is a bond lodged for you. If there is not, you should bring the issue up with the landlord. You can apply to Tenancy Services for refund of your bond even if the landlord does not agree. Thirdly, the Tenancy Tribunal is the venue to sort out any dispute between tenant and landlord. It seems strange that the landlord will first comment on the acceptable smell of the carpet and then afterwards dispute that very comment. If you cannot agree over the bond the landlord will have to justify any claim before the Tenancy Tribunal. A landlord cannot simply “keep the bond” because he should not still have it – he should have lodged it in your name at the bond centre. Fourthly, the use of your electricity for an adjoining shop is probably unlawful. You should seek compensation from the landlord for the electricity the shop has used. - Bernard Parker

House And Land

Q

We are wanting to purchase a house and land package in the Waikato market, but we are finding it hard to get the finance we require with banks. Is it worth looking to non bank lenders and are the interest rates a lot higher?

A

Non-bank lenders play a very useful part in the lending environment, due to the fact they are able to offer solutions that banks can’t – this is the very reason they exist. If you find yourself in a situation where banks are refusing to lend (which could be for a myriad of reasons) then the non-bank space is definitely something to take a look at to ensure you’ve considered all options when making a financial decision.

Non-bank pricing can be higher than bank pricing in many cases, so you’ll need to determine if the interest rates and/or fees make sense depending on what you’re doing. It is a space I would strongly recommend getting advice on for your own personal situation; the reason for this is that there are both long-term, and short-term products, and what suits you best might be dependent not only on your current situation, but also your future situation and intentions too.

For example, you might find that you’re in a situation where you want to commit to a property today, and so a non-bank solution might be suitable for the beginning stages of your lending (perhaps six months, or 12 months, for example) but due to some changes happening in your personal situation in the future, you may then be able to qualify for bank funding at that point in time. This might mean that you can move back to a bank in the short-term. - Ryan Smuts

Pet Problem

Q

Our tenant has bought a dog and it now lives in our rental property. There is nothing in the agreement about pets, but we didn’t give permission for this. Do we have any rights in this situation? We have a fixed-term rental arrangement until the end of 2021.

A

It is important that a tenancy agreement sets out everything the landlord and tenants have agreed to in writing, and is signed and dated by both parties. The tenancy agreement template on the Tenancy Services website is a good guide to the information required in the agreement.

If no additional clause regarding pets is written into the tenancy agreement, the landlord should first talk with the tenant and remind them that keeping pets on the property is not part of the tenancy agreement. A tenant is responsible for any damage, other than fair wear and tear they cause, regardless whether it is intentional or not. This includes any damage done by their pets. If a tenancy situation changes and requires both the landlord and tenant to agree on a new arrangement, the both should discuss the issues and try to reach an agreement.

The landlord and tenant should agree on all terms and changes and have these written into the tenancy agreement or on a separate document attached to the agreement as a variation of conditions, which must be signed and dated by both parties. Regular property inspections ensure the tenant is maintaining the rental property as agreed.

Tenancy agreement templates are available here: tenancy.govt.nz/starting-a- tenancy/tenancy-agreements. For more about pets, see tenancy.govt.nz/ starting-a-tenancy/tenancy-agreements/ rules-about-pets. - Steve Watson