Subdivision And The Bright-Line Test
How would an investor be affected when subdividing and adding a second home to sell?
1 August 2021
If I subdivide the rental property I have had for 20 plus years, so the original house is on its own title and then either build a new house or move a second hand home onto the second title, is the rental affected by the bright-line test if it is sold?
Secondly, would the new house be subject to the bright-line test?
For bright-line purposes, land subdivision is on the “purchase of dirt” rule, ie the date the land itself was acquired determines the bright-line rather than any date a new legal title is issued or a new house is built.
That said, remember that section CB 12 taxes a gain derived from the subdivision of land where the development or division occurs within 10 years of acquisition and the work is more than minor. Section CB 13 can also tax a gain from subdivision beyond 10 years if the work involves
“major expenditure on earthworks and roading”. Both CB 12 and CB 13 have exemptions for a taxpayer’s residence and exemptions where the development is done to derive further rental income rather than sell. - Mark Withers
Capital Gains Tax
I have owned a house in Auckland for over two years. When I bought the property, it was meant to be my home to live in. However, due to it being too small I reconsidered and rented it out. I have been living in a rental property since.
I would like to sell this house and buy a bigger one. Do I need to pay tax on the capital gain on this property?
I am going to assume that you bought the house on or after March 29, 2018. This is a significant date because this is when the bright-line period shifted from two years to five years. If you bought the property before March 29, 2018 then the two-year rule should apply and that has now expired so you would not face a taxable sale. So proceeding on the basis that the five-year period is applicable, you will need to pay tax on any capital gain you realise.
To confirm the core requirements, the bright-line rule applies to the purchase and sale of residential property – which is what this appears to be. Second, you are buying and selling it within the applicable five-year period. Third, there is a “main home” exemption, and you will no doubt wonder whether that is applicable or not.
Unfortunately, the main home exemption is based on actual use of the property and not intention. So while it is acknowledged that your intention was to live in this property, because you have not actually done so, it does not qualify as your main home and therefore you do not get the exemption.
- Matthew Gilligan
Is this a [good] strategy? I have a house in Auckland, with a $1.6 million CV and $365,000 mortgage. I want to use the equity to buy a new house and pay off the mortgage on my existing house but keep as a rental.
Can you advise if this is a strategy that may work?
This is definitely a strategy to pursue and one which most investors who own a number of properties have used to continue to grow their portfolio over time. With most properties in Auckland being worth well over CV you probably have more than $1.2 million of unutilised equity which could be used for investment purposes.
Note, however, that this only ticks one part of the lending equation and you still will need to meet a lender’s loan affordability requirements. These are different to how you will assess the cashflow side of the investment as they scale the rent down and then assess the mortgage on much higher test rates. Good luck with your investing - Kris Pedersen
Investment Property And LTCs
I have an owner-occupied property and two rental investment properties in an LTC. We are looking to buy another rental investment property with good land and a plan to tenant it now, and in two to three years develop [it with] new homes (potentially four to five dwellings).
We are planning to buy this with a partner who also holds properties under their LTC. Should we jointly buy this under a new LTC? Would we need to change the legal entity when we develop more properties? We may keep the new builds as investments or sell.
Given how important specifics are when it comes to putting in place an appropriate structure, I cannot give a definitive answer to you and your business partner as to what would be the appropriate structure for your plans here. What I can say generally speaking is that a company does work well when you go into business or investment with another party because you can achieve clarity in terms of how ownership is split by dividing the shares into the appropriate proportions. You can also get robust governance by putting in place a shareholders’ agreement.
However, there are variables when it comes to setting up a company, such as how the shareholding is arranged within your respective structures and also whether or not the company is an LTC, which I cannot advise on based on the broad facts here. You will both need to seek specific advice so that you get a structure that plugs into your respective existing structures as effectively as possible.
You asked the question as to whether you will need to change legal entity when you develop this property. In short, there will be no necessity for you to change entity and in fact there may well be disadvantage in doing so. I suggest you seek advice as noted and put this property into an appropriate structure from the start, taking into account the likelihood of the development in the future. - Matthew Gilligan
Renting A Granny Flat
If there is a granny flat under the house, with a separate entrance (you have to go outside and downstairs to get to the flat), then is it a separate dwelling? We are enquiring to see if a heat pump is needed down there as there are two living areas – one with a heat pump, one without – and two living areas in the downstairs flat, with no heat pumps. It is very cold down there, there is a kitchen, bedroom, bathroom and two lounges – no heating and no extractor fan in the kitchen.
Firstly, the owners of the property will need to ensure the granny flat is compliant – that is, that it meets council regulations. If it is not compliant then it cannot be rented separately as landlords must comply with all building and health and safety requirements (RTA 1986 section 45(1)(c)).
Assuming that it does comply, then it will be considered to be a separate dwelling and can be tenanted as such. In that case the granny flat must comply with the Healthy Homes standards (HHS) within 90 days of any new tenancy signed on or after July 1, 2021. One of the two living areas in the granny flat will need to have a compliant heating source installed. The heating source needs to be fixed and have a heating capacity which is equal to or greater than the heating requirement (obtained from the Tenancy Services online heating calculation tool). The size of the heater will depend on the size of the living room and other factors such as the construction of the dwelling. It must be capable of heating the room to 18°C on the coldest day of the year.
I note that there are two living rooms in the granny flat. It is not necessary to install heating into both living rooms; just the larger of the two. The kitchen will need an extractor fan installed, that has a minimum ducting diameter of 150mm or an exhaust capacity of at least 50 litres per second. It must be vented outside the property.
The bathroom will require an extractor fan with a minimum diameter (including ducting) of 120mm or an exhaust capacity of at least 25 litres per second. If the kitchen or bathroom has an existing fan, which was installed before July 1, 2019, then those areas are deemed to meet the ventilation requirements, provided that the fan is in good working order and extracts air outside.
The property will also have to meet the other requirements of the HHS – insulation; moisture ingress and drainage; and draught stopping. - Ryan Weir
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