Q

I have a rental owned in a trust. The trust is quite old, and we have been advised by our solicitor to wind it up and disperse the assets. Selling is not practical due to falling house prices and I need the rental income in my financial circumstances. Can the trust deed be updated and is it expensive?

A

Unfortunately, without reading the trust deed I cannot provide a definitive answer. However, I have a few thoughts that hopefully are of use. First, whether or not you can update the trust deed depends on whether there is a clause in the deed that enables trustees to make changes. If such a clause exists, then you likely will be able to update it. On the other hand, if no such clause exists it is far more difficult to make changes. It may still be possible, as there are statutory provisions that allow for deeds to be varied, but this requires approval of all beneficiaries.

While this may suggest the best course of action is for you to wind up the trust and transfer the rental out, there may be downsides. For example, there can be tax consequences on transferring property, including resetting the bright-line period, which could be very undesirable if a sale arises in the short to medium term. fortunately, there may be an ability to claim “rollover relief”, which can save you from a negative impact of the bright-line rule. However, whether or not rollover relief is applicable to you is another issue I cannot resolve without more information. There may also be other consequences of winding up the trust and transferring the property out, such as depreciation recovery and increasing your personal asset base which might be detrimental in the context of eligibility for the residential care subsidy should you require rest home care in the future. As you will appreciate from the above, there are several issues that require careful attention and you should seek expert advice. - Matthew Gilligan

Q

After the Auckland Anniversary Day floods, my three-level townhouse rental was damaged. The ground floor, including a garage, bedroom, en suite, and courtyard access, was flooded and needs remedial work that will take several months. As a retiree I cannot afford the rental property to remain vacant, so I am considering renting out only the top two levels. However, I am unsure about the process and increasing the rent once the remedial work is complete.

A

Before moving forward it’s important to consider a few things. Firstly, make sure there is no damage to the upper levels of the property, as flooding can cause significant damage from capillary action. Any dampness, mould, or moisture on the upper levels could be a violation of Healthy Homes regulations. Secondly, you’ll need to determine a suitable rent for the tenancy that excludes the ground floor, and consider a rent subsidy to compensate for the disruption caused by remedial work.

Additionally, decide on the rent once the remedial work is complete and the property is fully restored. When advertising the property, make it clear the ground floor is initially excluded from the tenancy due to flood damage. Be sure to mention the starting rent, the indicative duration of the remedial work and the anticipated rent once the ground floor is included, so prospective tenants are aware of the situation. Prior to entering into a tenancy agreement it is advisable to discuss the entire situation with your tenants to prevent potential disputes. Take steps to ensure you don’t interfere with the tenant’s quiet enjoyment during remedial work. This includes minimising disruption caused by tradespeople, only carrying out work during reasonable hours, and keeping tenants informed of work.

Consider putting the ground floor on an electrical check meter or having some sockets metered, so you can reimburse the tenants for the electricity used by tradespeople. Finally, once the ground floor is restored and made available to tenants, you can increase the rent as it constitutes a material benefit, even if it’s within 12 months of the tenancy starting. Section 28 of the RTA allows rent increases with tenant consent and this variation would need to be recorded in writing. -Ryan Weir

Q

I am getting a replacement roof on my rental property (replacing like with like) so it should be a revenue expense. My question is: Where do I allocate the deposit paid in the 2023 tax year? The balance won’t paid until the 2024 tax year.

A

Roofs are generally considered part of the building and as such a replacement will normally be maintenance provided the building was not acquired with the roof already at the end of its life. If it was these will be dilapidation repairs that will be capital expenditure. Rental accounts are generally prepared on a cash basis so if the new roof is revenue expenditure claim the costs in the tax years in which the expenditure falls. -Mark Withers

Q

We are a growing family and want to upsize our housing. During Covid we thought about building on our subdividable section, for which we have resource consent but not titles.

Building costs started increasing so we thought about selling both properties to upgrade to a four-bedroom house. We would sell the section first and then the house.

We have $280,000 fixed for another three years at 3.79 per cent that we would target holding on to during any house switch.

I understand nobody knows what house prices, interest rates will do, but would it be in our best interests to subdivide, keep the mortgage on our primary house, or sell both and hopefully make a step up in house size, particularly as house prices are falling?

A

With you looking to upsize I presume this means you are looking to take on more debt at some stage. Make sure you can get the additional debt from your existing lender as you are relying on them to provide this funding if you want to retain the existing mortgage which has a good interest rate. Note, funding is a lot tougher with the bank assessment around loan affordability being tight on the back of interest rate increases. As to what you are best to do, my recommendation would be to get a firm idea on costs and then get a registered valuer through so you can get an idea of how the different options stack up.

From there you should be able to make a more educated decision on which option to pursue. Note that if you needed funding for the build or development and the lender requires a valuation these days you would be best to check if the lender needs you to order the valuation through one of the portals such as Valocity to ensure the valuation will be accepted. -Kris Pedersen