What’s the best way to go, for a rental property owner who wants to restructure both their holdings and their borrowings effectively?
1 May 2020
I currently have a rental property in a look-through company (LTC) with a mortgage maturing in eight years. I top this up out of my salary. I live in my own home freehold which is in a trust under my name. I don’t plan on selling either of these houses within the foreseeable future (possibly retirement 20 years away).I have a new partner and we are planning on purchasing a house together, 50/50 for our blended family to all move into. We would be borrowing 100% using the equity we have in both parties’ houses. I pay child support direct to IRD if this has any bearing on my question.
My question is in relation to tax structure in particular for me (trust/LTC). I plan on raising the equity to afford my borrowing against both my properties. Are there any tax loopholes or traps that I could fall into? Is it better to keep my structure the same and borrow equal amounts from the LTC and trust or should I collapse the trust, putting my once home into the LTC?
The issue here is that by default, interest on money borrowed to buy a new home will not be deductible, even if it is secured against rental properties. That said, there are opportunities to effectively structure the borrowing. For example, you should consider selling the existing dwelling to your LTC. Doing so would give you a reason for undertaking borrowing in the LTC (to buy the existing house) and then have that money flow through to the trust to purchase the new home. As the LTC would be borrowing money to buy a rental, the interest would be deductible.
However, you need to be cautious because there can be tax consequences of moving property between related entities, including the restart of the five-year bright-line clock.
Further, you need to check that there won’t be any tax consequences for the trust as vendor. Another bonus in moving the property into the LTC is that it would be easier from an accounting perspective. It would also ensure that the profits and losses of the two residential rental properties are automatically grouped, which can be useful where rental losses are ring-fenced.
You note that child support is a potential consideration, but one that is beyond the scope of this brief answer. In the end I would encourage you to keep the trust to own your half share of the new home and to get advice around the potential transfer of your existing home into the LTC.- Matthew Gilligan
Until recently, I was thinking of buying an investment property in the near future. But now, with everything that is happening with coronavirus, I’m not sure that it’s a good idea. But I understand house prices might go down a bit now. What do you think is likely to happen with the property market going forward? In a few months’ time, could it be a good time to buy a property?
There is probably going to be some short-term price decreases. That’s because of the flow on effect to the overall economy, especially from the lockdown period, and then how hard certain sectors – like tourism – feel this and the time it will then take for them to get back on their feet.
I recently read an economist’s opinion and he expects New Zealand to have its worst ever economic quarter coming up. But the key point was that he also believes that at some point in the following 12 months we will have our best ever quarter as the economy rebounds.
There is no need to rush in and buy at present. Instead I would encourage you to get yourself into a position where you can purchase as at some stage there are going to be good opportunities that will present themselves. - Kris Pedersen
Higher Rent After Tenancy BreakQ
We have a property manager. Our tenant asked to break his one-year lease and we have agreed but, as we know, he still has to pay until a new tenant is found. However, our agent says that we cannot advertise the property at a higher rate once he has paid his break lease fee. Surely if it is a brand-new tenant it is a new agreement?
There is a view that advertising a property at a higher rent is an unfair disadvantage to the tenant who wants to break their fixed term.
However, the tenancy may have been going for more than a few months and the market may have moved in that time, in which case it is reasonable to ask for a current market rent for the next tenancy.
The Tenancy Tribunal can make an order reducing the rent if it “exceeds the market rent by a substantial amount”. Market rent is described in section 25(3) of the Residential Tenancies Act. It is essentially the rent that a willing landlord and a willing tenant can agree on, taking into consideration the “general level of rents … for comparable tenancies of comparable premises in the locality”. - Bernard Parker
Structuring For Development
I have an existing limited liability company (LLC) and a family trust. All five of the properties
‘You need to be cautious because there can be tax consequences of moving property
between related entities, including the restart of the five-year brightline clock’
I own are in the trust. The LLC runs a driver training business and now a property management business. The LLC is not GST registered as it is below the threshold.
Now I plan to expand my business by adding a few services like project management and developing and trading properties through the LLC. By doing so,
I will have to get this LLC GST registered. Am I correct? I’m about to embark on constructing a new property for the family trust (client).
The LLC will be charging/invoicing the family trust for the materials and services in constructing the property. The LLC will then claim the GST for the services and purchases of materials.
Is there any problem or conflict of interest with this structure? Should I form a separate LLC to run the project management and property trading?
Yes, the company will need to be GST registered as it will be conducting a continuous and regular taxable activity of more than $60,000 turnover. The company can claim GST on materials it buys to supply to the trust but must, of course, charge GST to the trust that the trust won’t be able to recover, so it’s a net/net situation on GST for the company.
But there is no issue with doing that. The alternative is that the trust just buys it materials direct from the supplier. There is no real tax advantage in separating the activities the company is undertaking but there may be a commercial reason.
Property development is risky. If you experienced a failed development that rendered the company insolvent this would place at risk the other business that it operates.
This would be avoided if separate companies were used. - Mark Withers
Using Rent Over-Payment
I have over-paid my rent and am now in “advance” to the tune of almost $5,800. When I give notice should I still keep paying the rent or would it be okay to use the amount I’ve paid in advance instead?
By law, two weeks rent is the maximum amount of rent in advance that a landlord can request. It is unlawful for a landlord to request more than this amount. If a tenant has asked to pay rent in advance of more than two weeks, this should be recorded in writing and signed by both parties.
If the tenant has made an error with over payment, they should contact the landlord immediately to discuss the over payment and request a refund. If at any point a tenant requests a refund of the excess rent in advance, even if they did request to pay the landlord more than two weeks’ worth, the landlord would need to refund this amount.
In your situation, if you do not want a refund and would like the excess to be used for future rent payments, this should be agreed in writing between you and your landlord.
It is recommended that you keep evidence of both the agreement and rent payments made.
If you are intending to end your tenancy, you will need to make sure you give the correct notice for your type of tenancy and ensure that it is agreed in writing when the last rent payment will be paid to the landlord. If you are still in excess after your last rent payment, you can request a refund in writing from your landlord. If your landlord does not refund the excess, you can take the matter to the Tenancy Tribunal. - Jennifer Sykes.