Q

I’ve been advised by the local council that we have a water leak. This has been investigated by our plumber. The problem is that it’s under the concrete floor so it will be a major to fix.

Can we give 90 days’ notice to our tenants? Or can the house be classed as unliveable to get the tenants to move out faster?

Note that they will have no bathroom or kitchen while we find the leak and fix it. We are happy for the tenants to move back after the repairs and we will be asking them if they have a possible place to stay while the leak is being repaired.

A

You will need to confirm how much time you will need to have the repairs done. This will indicate how long the tenants will need to be away from the property. Then you can discuss with the tenants whether they can move out for that time.

If not, then you may need to end the tenancy, either by agreement with the tenant or by an order from the Tenancy Tribunal. Section 59 of the Residential Tenancies Act states that where a “part of the premises is so seriously damaged as to be uninhabitable”, the Tenancy Tribunal may end a tenancy if it is unreasonable to have the tenancy continue in the circumstances.

However, the best solution all round would be to come to an agreement with the tenants on a timeframe for repair that you can all live with. As an aside, you should be able to get a credit for some of the water charges from the local authority, provided you have taken prompt action to fix the water leak. - Bernard Parker

Subdivision Taxes

Q

I have had a rental for the past five years under a look-through company. The property consists of two dwellings. I am now in the process of subdividing and getting two titles for the two dwellings. I am not sure if the development can be classified as major or minor and thereby would attract tax on the profit if I sell both the dwellings.

The work undertaken consists of having to upgrade the existing vehicle crossing and a new storm water connection. The total cost is about $15,000 and all the council and engineering costs are about $40,000. My question is if I sell both the houses after getting the separate title, will the profit be taxable? This sale will not attract the bright line test law provisions.

A

Based on the facts you have provided, you are commencing a subdivision within 10 years of acquisition, which means if the subdivision involves work of more than a minor nature then section CB 12 of the Income Tax Act will apply and any gains will be taxable. I can’t give you a firm view on whether your subdivision will qualify as minor or not because there are considerations outside of the facts you have given that are relevant.

What I can say is that if you are subdividing one into two and there are relatively minor costs involved and little physical work then there is definitely a prospect of you having an arguable position that the work is minor in nature only. Then section CB 12 does not apply.

Although you are quite right that the bright-line rule would not apply if you have held the property for five years, there are other provisions that you need to cover off as well. For example, section CB 14 can apply where a property is sold within 10 years and it has benefited from a rezoning or a resource consent being granted.

I strongly recommend that you get tax advice before proceeding and ensure that any tax position you take is supported by robust, written advice from a tax specialist. - Matthew Gilligan

Invest Or Reduce Loan?

Q

I own a home worth $875,000 in today’s market and I have a mortgage of $540,000. I also have savings of around $150,000. I was looking at the option of investing in a property at around $700,000. By borrowing on my equity and using my savings I should be able to get 30-40% deposit for investing. I am self-employed, so what’s the best option here in terms of tax and financial benefit long term? Should I use my savings to reduce my personal loan or invest it?

A

It is definitely worth getting tax advice here to make sure. But my understanding is that you would be best to look initially to use your funds to reduce your personal mortgage and then reborrow for the investment purpose.

That would mean 100% of the borrowings will be for the investment and can be related to the tax benefits. Given you are self-employed, make sure that you talk to an accountant in regards to this as there may be other tips worth taking into consideration as well. - Kris Pedersen

Complete LTC Picture

Q

We are about to rent out our family home and have been advised to set up a look-through company (LTC). I have spoken to my lawyer, accountant, and mortgage broker, and while they gave me advice pertaining to their area of expertise, no one could give me a complete picture. So I have these questions:
1. Is it advisable to set up the LTC before we let our property out or can we do it after?

2. When we sign a tenancy agreement would it need to be under the name of our LTC or as private individuals?

3. If we set up the LTC after we let out the property, would it need a new tenancy agreement?

4. Would the LTC need a separate bank account of its own and would all income and expenses going in and out need to be from there?

5. Does having an LTC limit my borrowing capacity for future purchases?

6. From a future borrowing capacity does it matter how we structure the LTC ownership? (I am the principal income earner and have been advised to have 10% of the LTC ownership, whereas my wife to keep 90% while she is the secondary income earner?)

A

1. An LTC restructure will only be necessary if you need to refinance equity out of what was your old family home. It should be done when you begin renting the property out and would normally be coordinated to align with your purchase of a new home.

Remember any losses in the company are now ring-fenced and the restructure will reset the bright line for the property.

2. Once the company owns the property, the tenancy agreement will be with the company.

3. Yes, once the company is set up you would need a new tenancy agreement.

4. Yes, the company needs its own bank account and should account for all its relevant transactions through it.

5. No, having the company won’t limit your borrowing capacity for future purchases.

6. It won’t affect your borrowing capacity but it sounds a lot like you are assuming you can offset rental losses against your income. You can’t do that anymore: you have this government to thank for ringfencing them. - Mark Withers

Repairs Refund Dispute

Q

Between tenants we had repairs carried out to a toilet and laundry in our rental. The incoming tenants were informed - via our property manager - that the repair was going to take longer than planned due to unforeseen water damage.

The new tenants took occupancy of the property although the repair work was still ongoing. They are now retrospectively requesting a refund in rent on the grounds that the house they signed up to was not fully functional.

There was still a functioning toilet and bathroom within the property. Are we as landlords obliged to reimburse rent?

A

It is the landlord’s responsibility to provide and maintain rental premises in a reasonable state of repair while a tenant is living in the property. If a landlord needs to enter the rental premises to carry out necessary repair work, such as water damage, they would need to give the correct notice of at least 24 hours. The repairs for this work should be done between 8am and 7pm.

If there is a dispute regarding ongoing repairs, the landlord (which sounds like the property manager in this case) should firstly speak to the tenant to try and reach an agreement. Both landlord and tenant should have previously reached an agreement in writing on how long the repairs will take and the impact of those repairs if they began before the commencement of the tenancy.

The initial agreement will be important to any future agreement and the outcome of this situation. As the repair work is taking longer than expected, a new agreement could be put in place. As an tenant pays rent in exchange for the full use of the property, a rent reduction could be considered while the tenant does not have full access during this timeframe.

It’s also worth noting that under the law, a tenant is “entitled to have quiet enjoyment of the premises without interruption by the landlord or anyone at the premises on the landlord’s behalf”.

While the repairs are necessary, the landlord should consider the impact the repair work will have on the tenant’s “quiet enjoyment” and factor this into any new agreement with the tenant.

A rent reduction or any other arrangement needs to be negotiated and agreed in writing between both parties. If the dispute continues without an agreement able to be reached, either party can apply to the Tenancy Tribunal to have the matter resolved. Any agreements made in writing relating to this dispute will be required as evidence. - Jennifer Sykes