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Specific Benefits Of Social Housing

Specific Benefits Of Social Housing

It pays to be aware of the interest limitation rules when considering this kind of property investment.

By: Sally Lindsay

2 July 2023

Q. I am considering investing in a Whangarei property to be leased to a community housing provider. Before I go ahead are there any tax obligations I should be aware of?

A. Yes there is a specific benefit. Income Tax Act section DH (4)–(6) provides that the interest limitation rules do not apply to:

• interest incurred for a property used exclusively by a registered community housing provider, Kainga Ora homes and communities, or another government department to provide social, transitional and emergency housing

• interest incurred in relation to a property used exclusively by a local authority or council controlled organisation to provide council housing

• Kainga Ora and its wholly-owned subsidiaries.

So a lease to a social housing provider provides an interest deduction to the investor even if the property is not a new build if it is used by them exclusively for those stated purposes. A seemingly smart move by the government to give themselves the benefit of an exemption to the rules they expect us to abide by that gives them a flow of rental property that they don’t have to buy that would not otherwise be available in the private sector.

Just a word of warning, when dealing with community social, emergency and transitional housing providers, don’t assume they are “registered”. If they aren’t registered providers there is no exclusion to the interest limitation rules. Visit the website of the Community Housing Regulatory Authority at www.chra.hud.govt.nz. I dealt with a situation recently where the lessee was an organisation one would have assumed was registered. A check of the register revealed they were not.

- Mark Withers

Q. Is there a cooling off period on refixing interest rates? Four weeks before rollover I fixed a rate and less than 24 hours before it was due to kick in, I asked if I could change it. No change in cash rate, I just fixed under pressure over the phone and agreed to the rate over the phone. I should have done it differently. Is there consumer law around this?

A. My view is that once locked in the lender can incur a cost if the client breaks and the lender has the right if incurred to pass this cost on. However, there may be something in regards to time frames. In all likelihood the bank will have the conversation recorded as a reference point for any complaint. Different banks have different rules. Some may just charge a set fee whereas others may charge an actual break cost.

- Kris Pedersen

Q. If my partner buys into an investment property (50 per cent), initially bought in 2020, will this reset the bright-line test for the initial purchase?

A. I am going to make some assumptions about the facts here. I assume that the property is currently 100 per cent owned by the original purchaser who bought it in 2020. The plan is for 50 per cent of it to be transferred to a new owner so that the ownership will be split 50/50 between the original owner and the new owner.

Working through the tax implications, we need to start with the original owner and the consequences of them disposing of a 50 per cent interest. In short, if this transaction happens now, the new owner will be selling 50 per cent of the property within the applicable five-year bright-line period. This means if there is a gain generated on the disposal, it will be taxable to the original owner, unless an exemption applies.

On the basis that this is an investment property, there is unlikely to be an applicable exemption. The 50 per cent share retained by the original owner continues to be subject to the same five-year bright-line period commencing 2020. Looking at it from the new owner’s point of view, they acquire a 50 per cent interest in the property that will be subject to a 10-year bright-line period from the point of acquisition. Note, however, that there are different ways of doing this that can have different outcomes. For example, there are “rollover relief” provisions that apply on transfers pursuant to a relationship property agreement. You should seek specialist tax advice here before proceeding.

- Matthew Gilligan

Q. I have offered a property to a tenant to rent by emailing them the tenancy agreement. I have signed it, but they have not signed it yet. Unfortunately, my circumstances have suddenly changed, and it no longer suits me for this tenancy to go ahead. I’m worried that, because I’ve issued a tenancy agreement, I’m committed and I can’t withdraw the offer. Do I have the ability to withdraw the offer or am I legally bound once the tenancy agreement has been issued?

A. You can withdraw an offer as long as the tenants have not communicated acceptance of the offer. If the tenant has communicated acceptance, then it is too late, and an unconditional tenancy agreement is created. The moment the tenant communicates acceptance, an agreement is made that is binding on both parties.

To prevent this tenancy from going ahead, you must act swiftly to withdraw your offer, preferably by phone and in writing. By promptly notifying the tenant about your changed circumstances and the withdrawal of the offer, you can avoid entering into a binding agreement.

To help you in the future, let me explain the correct procedure for signing a tenancy agreement. Contracts are fundamentally based on the concept of an offer being made and accepted. Turning our attention to the concept of property ownership, you never encounter a scenario where a vendor initiates an offer to purchase their own property; such a notion would be nonsensical. In the realm of contracts, it is consistently the prospective buyer who assumes the role of making the offer. ln tenancy law, it should always be the tenant making the offer, not the landlord.

The process is: you start by sending out an unsigned tenancy agreement. To commit to taking the property, the tenants sign the tenancy agreement and send it back to you. That’s known as making the offer. If you accept the offer, you do this by signing the offer and then communicating the acceptance of the offer to the tenant. This is usually done by emailing the signed tenancy agreement back to the tenant where they can see the signatures for themselves. That act of communicating the offer creates the binding contract.

If you follow this process in the future, it will prevent the situation you’re currently facing.

– Ryan Weir