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Claiming Losses

Can an investor with positively geared properties who is buying a negatively geared property in partnership claim their share of the losses to offset their other properties?

By: Property Investor Team

31 October 2020

Q

My wife and I own a couple of investment properties. We are positively geared and pay taxes on our rental income. We are looking to buy a third property in partnership with family members and set up a company ownership. This property is negatively geared. Can we claim our share of the losses from the company to offset our original properties?

A

Provided you adopt the portfolio approach to loss ring-fencing your share of loss from a Look Through Company that owns the joint property can be offset against the rental profits your partnership makes. That’s because the assets are deemed to be held at the shareholder level for tax purposes. Note though - the company does need Look Through status for this to be a possibility as losses in closed companies can’t flow to shareholders. - Mark Withers

Maintenance Responsibility

Q

I did a physical inspection of my rental property and found it was in a poor state of repair with the grounds not being maintained, full gutters, dirty and untidy. I have since terminated the agreement with the property management company. My new property management company has needed to carry out water leak repairs of $10,000 to fix up the roof, gutters, and cracks.

These repairs were due to the property not being properly maintained. Plus there are additional costs to bring the property up to an inhabitable standard. What recourse do I have with regards to the previous property management company?

A

It seems that the previous property management company has been slow in advising you what maintenance is required. I suggest you look at the contract that you had with the property management company. Did it have the authority to go ahead with maintenance as needed, or did you reserve the right to authorise spending?

A property manager as agent cannot exceed the authority given by the owner. Also, in the final analysis, the property (and the ultimate responsibility for the cost of maintenance) belongs to the owner. Even with the lack of communication, this is maintenance that was your responsibility. - Bernard Parker

Temporary Reduction Woes

Q

We have a fixed term tenancy agreement with our tenants. During the Covid-19 lockdown we reduced the rent as the tenant’s income had stalled. We got this in writing with an end date. As of the end date of the reduced rental rate we have informed the tenants we would like rent to return to the full amount as per the fixed term lease.

The tenant has told us they would like to continue paying the reduced rate, which is not an option for us. We have suggested that if they cannot afford the full rent another option could be release of the bond to our property manager who would top up the rent weekly from the bond. The tenant has threatened to break the fixed term contract to find a cheaper rental. We did not think this was legal. What are our options?

A

A landlord and a tenant may agree to a temporary reduction of the rent for a set period. Once this period has ended the rent returns back to the original amount. Tenants must ensure they pay the correct rent amount on time, and can be liable for any outstanding rent.

While bond can be used to pay for any rent arrears, this will need to be agreed to by both parties. If you can’t agree on the refund amount, you will need to apply to the Tenancy Tribunal to resolve this issue.

You cannot give notice to end a fixed term tenancy early. Fixed term tenancies can only be ended early if the landlord and all the tenants agree. Any agreement should be in writing and should include what’s been agreed to. Both landlord and tenant should keep a signed copy of the written agreement. A landlord may recover their reasonable expenses for ending the fixed term early as part of their agreement.

Landlords can only ask tenants to pay their actual and reasonable costs. For example: the cost to advertise for new tenants. A tenant may apply to the Tribunal for an order reducing the fixed term if they have had an unforeseen change in circumstances that will result in severe hardship. This hardship would have to be greater than the hardship the landlord would suffer if the term is reduced. The Tribunal may order that the tenant pays reasonable compensation to the landlord in this situation. - Jennifer Sykes

‘We also encourage clients to seek asset protection in respect of their home – it may be prudent to transfer your home into a family trust to get such protection’

Effective Structuring

Q

I have recently used the equity from my home to build a new residential home. My previous home has become my investment property and is now being rented. First up, how do I structure this investment so that I don’t end up paying too much tax Secondly, how would it be best to structure my mortgages? (I have two sets of mortgages at the moment.)

A

You will not have an effective finance structure in place at present. Interest you pay on money you have borrowed to build your new residential home will not be deductible. The rent you receive on your old home will be taxable. Often the best strategy is to sell the old home into a rental company.

This allows you to restructure your bank borrowing, with the company undertaking borrowing to pay you for the purchase of the old home. This generates the necessary nexus between the interest on that borrowing and rental income and allows you to claim it as a deduction for tax purposes.

However, the sale of the property from you into the company can result in tax to pay if you are not careful. Seek advice on this. Further, the transfer into the company will see a reset of the five-year “bright-line clock” so that any sale of your old home within five years of transfer could result in a taxable gain.

We also encourage clients to seek asset protection in respect of their home – it may be prudent to transfer your home into a family trust to get such protection. Finally, we advise clients to split their properties between different banks. The idea is to borrow as much as possible against the old home (that is now a rental), and minimise the amount that is borrowed against your new home. A skilled mortgage broker could help you implement such a finance structure. - Matthew Gilligan

West Or South?

Q

If you had to sell one of two properties to purchase a new family home, which one would you recommend - the one in West Auckland or the one in South Auckland? That’s given the current market.

A

It is hard to answer this without knowing more about both properties and the flow on effect that they would have to assist you in purchasing a family home. Firstly, if the focus is on the family home you may want to talk to a mortgage adviser to see what impact selling either of them will have on your financial position. You should also find out the flow on effect to borrowing power as that might assist you in making your mind up there. (Feel free to touch base with us on this.)

If there isn’t much of a difference, then you want to make a call on which property is a better option as a long-term rental. You may want to take into consideration factors such as how hard either have been to find good tenants for and the ongoing maintenance requirements on each of them. Also, think about other factors like future upside potential (for example, whether either have the ability to subdivide or not). Spend some time looking at, and considering all of these factors as you’ll then be able to make a better overall decision. - Kris Pedersen

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