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Falling Short Of The Five-Year Rule

Falling Short Of The Five-Year Rule

It pays to be aware of the traps when it comes to bright-line rules.

By: Sally Lindsay

1 February 2024

Q. We sold an apartment early last year, thinking it was just over five years from purchase, not understanding the five years only starts from settlement and ends at agreement to sell. We received a letter from the IRD that we will have to pay tax after falling short of the five-year rule by 10 days. Under the government’s new rules for the bright-line test will we still have to pay this tax?

A. Yes, the new government has signalled it will restore the bright-line to two years; the suggestion is that once the law change is in place any property that has been held for a two-year period will fall outside of its bright-line period. Your tax liability is determined by the bright-line rules that were in place at the point of disposal, so any gain will be subject to bright-line.

For the benefit of other readers, which bright-line rule applies is determined by what is in place legally at the point the property is acquired, which is the date an agreement for sale and purchase is in place for its acquisition.

The actual bright-line period day count runs from the point where you become the registered owner (settlement date) until the date you entered into a contract to dispose of the property. One exception to this is when the property is purchased “off-the-plan”. In this situation the count does start from when you entered your agreement rather than the settlement date. The fact that the entry date and the exit date are different does create a trap, and unfortunately it appears you may have fallen foul of it.

- Mark Withers

Q. We have a $395,000 mortgage on our owner-occupied home, which needs refixing. We have $75,000 in savings and would like to use that to offset a portion of the mortgage. Our fortnightly payments are $2,200, and that is well above the minimum payments. Should we just offset $75,000, so we have zero per cent interest on it? And how should we split $2,200 between two parts of the mortgage?

A. The first option is you look to split into a $320,000 part, which you would almost certainly fix, and then use the $75,000 as either an offset or revolving credit where you pay this part down to a zero balance. You could look to then increase your payment on the fixed split to the $2,200 per fortnight, which would pay the debt off faster than normal and leave the $75,000 costing you nothing but available to draw on if required.

Another option is to do a similar split but leave some debt owing on the offset/revolving credit portion, which reduces the size of the fixed-rate portion, and direct your incomes into this so all surplus money goes to paying this off faster. In this case you would probably focus the additional payments towards the offset/revolving credit part rather than the fixed loan part. An example here may be starting with a fixed loan split of $275,000 and an offset/revolving credit split with an initial limit of $120,000 and a balance owing of $45,000.

- Kris Pedersen

Q. We have just had a cash unconditional offer from the owner of the neighbouring property for our investment property, which requires the development plans that go with it and vacant possession. He is non-negotiable on this. However, we had tenants move in three months ago on a one-year lease. Are we able to negotiate a lease break by offering a financial incentive?

A. Exceptional circumstances aside, a fixed-term lease can only be ended if the tenants and landlord all come to an agreement. In this event, offering a financial incentive is one of the best ways to negotiate the early termination of a lease. We would recommend offering to pay your tenant’s move-out costs and cover any new costs associated with finding a new residential property to rent. Additionally, you should reassure your tenants that their tenancy can continue until they acquire a new place to live, at which point you will release them from the tenancy immediately. Unfortunately, unless you can come to a move-out agreement, you will need to turn down the unconditional offer.

- Eric Hammond

Q. A power outage occurred at an apartment I own due to a potential issue with the cable infrastructure. Despite the premises being intact, we advised the tenant to find temporary accommodation, like Airbnb, until the power is restored. Regarding rent accrual, I’m unsure whether to fully abate the rent while the tenant covers their own Airbnb costs, not abate the rent and cover their Airbnb expenses, or fully abate the rent and cover the Airbnb costs as well.

Additionally, I’m unclear on whether either party can terminate the tenancy under Section 59(1)(b) of the RTA which deals with “uninhabitable properties”. Given that the property isn’t structurally damaged but has a cable issue, does this situation qualify as “uninhabitable property”?

A. In the case of a power outage due to cable infrastructure issues, the situation may not meet the definition of “uninhabitable”. Instances of uninhabitable conditions typically involve serious damage or destruction to a premises, as seen in events like Cyclone Gabrielle. Therefore, invoking Section 59(1)(b) of the Residential Tenancies Act may not be appropriate. Given that the loss of power is likely not the fault of either party, Section 59 remains relevant. While you, as the landlord, are not obligated to cover alternative accommodation costs, it is reasonable for you to cover the tenant’s Airbnb expenses if they continue to pay rent while temporarily residing elsewhere.

In this situation, it’s crucial to maintain clear communication with the tenant. Discuss the temporary arrangements, ensuring that both parties understand the terms. While neither party may terminate the tenancy under Section 59(1)(b), cooperation and understanding can contribute to a smoother resolution during such challenging circumstances.

- Ryan Weir

Q. If I put a portable cabin on a small farm that was subject to GST, then let it out through Airbnb, would the Airbnb income be liable for GST?

A. Without more information it is difficult to answer this question. I note you mentioned that the farm “was” subject to GST, suggesting that there may not be any farming activity anymore? If total turnover from farming and Airbnb activity is less than $60,000 then there is no necessity to be GST registered. Furthermore, there is the question of what the legal ownership of the farm is, and the entity that is carrying out the rental activity. These things may be done through separate entities, which could have an impact on GST registration status.

- Matthew Gilligan

Q. We have a neighbour who shares a cross lease with us and three others in Auckland. The neighbour is putting an 8m x 4m unit on the back of their property, which will overlook ours and severely impact on our privacy. It is opposed by us and the others on the cross lease. Is there anything we can do to stop the building going ahead? All the materials are on site and the builder is apparently due to start.

A. The answer to the question will depend on the wording of your cross lease, which vary. Without sight of the lease, any advice can only be general in nature.

Most cross-lease agreements prohibit lessees from undertaking alterations or additions without the other lessees’ consent. This is usually with the proviso that consent cannot be unreasonably withheld. In deciding whether refusal is unreasonable, judges will normally weigh the detrimental effect on the other lessees against your neighbour’s benefit.

Detriment can include matters such as the loss of amenity, peace or privacy from being overlooked, which you say applies here.

In one case I am aware of, the installation of a French door and deck was said to create “a strong sense of visual intrusion” making it reasonable to refuse consent.

Your options may vary depending on where the proposed unit is placed on the property: on common property or on the neighbour’s exclusive use area. We recommend checking the flat plan and cross-lease agreement carefully.

If you decide construction would be in breach of the cross-lease agreement, then this may be grounds to seek an injunction from a court ordering your neighbour to stop work and/or to undo any work carried out.

If you want to prevent construction work being carried out prior to the case being heard, you will need to give the court an undertaking as to damages.

This is a promise that if the court ultimately decides against you, you will reimburse your neighbour for loss suffered because of the injunction. In making any interim order to stop work, the court will look at a range of factors including how strong your case around the breach is and how best to preserve the status quo.

As a court application will involve legal costs, if time allows we recommend writing to your neighbour first, telling them that construction would be in breach of the cross-lease and that all other lessees object.

You could warn them that if they continue, they risk a court ordering removal of the unit at their own cost, in addition to an order to contribute towards your court costs.

It would also be worth noting in the letter that construction could result in a defect in your neighbour’s title and issues when their property is sold depending on the nature of the unit.

– Shane Campbell