Q

The original tenant moved out of our property two years ago and left family members staying there. The original tenant did not get our written consent to sublet the property and at no stage prior to the original tenant moving out did they inform us they were doing so. We want to give notice to the current occupants. What is the best way to handle it?

A

Under section 44 of the Residential Tenancies Act, tenants may only sublet or assign a tenancy to someone else if there is no clause in the tenancy agreement that prohibits subletting, and they have permission from the landlord to do so. Tenants commit an unlawful act and may be liable for a financial penalty of up to $1,000 if they breach these requirements. Although there is no written agreement in place with the current occupants, the Act still applies.

It is not clear from your question what arrangements have been in place with either party over the last two years. There may be an implied tenancy in place given the current occupiers have been there for two years and you have likely been accepting rental payments from them and dealing with them as if they were the tenants when giving notices of inspections and similar.

Depending on what you agreed to, it may be prudent to serve notices to terminate the tenancy on both the original tenants and the current occupiers. This would ensure both are aware the tenancy is coming to an end.

Additionally, you should think about who the tenant is on the bond record and make sure you have the appropriate signature on any change of tenant or bond refund forms. There is more information available on the Tenancy Services website about ending a tenancy. - Jennifer Sykes

Rental Tax Obligations

Q

I have 3/4 equity in my home and I am planning to purchase a small unit as my primary dwelling and then rent out my first home to family. It will most likely be a short-term rental for a few years only. What is the best and most efficient way, financially, to do this with regards to tax obligations? I have owned my first home for over five years.

A

Your options are to do nothing but accept that none of the interest on the money borrowed to buy the unit can be claimed against the rent from the previous house, or, restructure the ownership of the previous house into an LTC with the money borrowed by the company to buy it. This will free up the equity to reduce your non-deductible private debt.

Be fully aware of two things though. Firstly, from April 1 losses flowing from the LTC will be ring-fenced. Secondly, the move of the old home to the LTC will re-set the bright-line test, meaning that if the house is sold by the company within five years any gain is taxable. These two issues need to be weighed against the benefits of the extra interest deductibility, especially when the previous house is not currently subject to the bright line. - Mark Withers

Smoke Alarm Authority

Q

Recently I was informed by our property manager that an after-hours call-out of an electrician was required because a smoke alarm was malfunctioning (constantly in alarm state). The alarm was only about two years old and is a photoelectric type with a 10-year battery life, which if removed from its base would go silent. It has since been destroyed and disposed of by the electrician.

Now we are expected to pay the call out fee and the replacement cost for the alarm, even though this could have been dealt with by the tenant and the faulty alarm replaced under the manufacturer’s warranty. Are we within our rights to dispute this with the property management company?

A

If you are not happy with the property manager’s decision you should discuss it with the manager. What level of authority did the property manager have? If the tenant did not have the capability to climb on a ladder or chair to remove the faulty smoke alarm I can understand the property manager calling an electrician on two counts – to stop the alarm from disturbing the tenants and to replace a faulty alarm with a working one which complies with the law.

Having no alarm is unacceptable under tenancy law, even for a night. Try to look at the big picture – you have a working smoke alarm, the house was protected by that alarm after hours, and the tenant is happy. - Bernard Parker

Start-Up Advice

Q

I am looking at perhaps purchasing a residential rental property. I have little knowledge on how to structure the purchase/how to run the rental. Should I speak to a lawyer or accountant first about how to purchase and so on before looking further? Should I buy it under a limited company or under my own name? Who do I speak with first before purchasing a property?

A

In regards to your question, I would first speak with an accountant to see what entity is best for you. Do note that there are changes coming in regards to what may be best as an ownership structure so ideally speak to a property accountant who is up to date with these changes. - Kris Pedersen

Renting To Yourself

Q

If I own a rental property, can I rent it personally to myself if I pay a proper rent and declare the income on my property tax return?

A

Legally it is possible for you to hold a property in a company or a trust and then rent the property back for you to occupy as your home. However, from a tax perspective, an arrangement where an individual rents a property back from a company they are a shareholder of, or from a trust they are a beneficiary of, is at risk of being regarded as tax avoidance. The IRD have been fairly clear over the years that they regard any tax benefit from such an arrangement as potentially being a tax
avoidance scheme.

Interestingly, with ring-fencing of tax losses on residential property about to come in, not only would you face the prospect of tax avoidance, but there would also potentially be no tax benefit for you in doing so, as any tax losses would be ring-fenced.

What about if there were no tax losses and instead a tax profit? You would then have tax to pay, which the IRD are unlikely to have an issue with, but you should have an issue with that as you would then be paying tax for the privilege of living in your own home. Unless there is some other motivation behind your proposal, it seems inadvisable for you to hold a property that is your home via a trust or a company and rent it back. - Matthew Gilligan

Rental Release Terms For Prisoner Tenant

Q

I have a tenant signed up until June, but he is now in prison. It seems it could be difficult to get him to release the tenancy. Until that happens I cannot re-rent or sell the property according to Tenancy Services. Access to the bond is also going to be difficult apparently. Have you any suggestions?

‘Legally it is possible for you to hold a property in a company or a trust and then rent the property back for you to occupy as your home’

A

Prisons are often very good at getting information to inmates, including forms for signing. If the rent is in arrears, you could attempt to get a mutual agreement signed by the tenant to bring the tenancy to an end earlier. This could be beneficial for both parties. You will have the property returned to you and the tenant’s debt doesn’t continue to grow.

If the property has other occupants – such as the tenant’s family - you also have the option of attempting to have the tenancy assigned to them. To do this, you would need the agreement of the current occupants and the original tenant.

If you can’t make contact with the tenant through the prison, there is no one living in the property, and the rent is in arrears, the law sets out a process for dealing with abandoned properties. There are two ways to end a tenancy that has been abandoned: an expedited abandonment application, or a standard tenancy tribunal application.

The details of the requirements and steps to be followed for each type of application are available on the Tenancy Services website in the “ending a tenancy” section. If the rent continues to be paid and you wish to end the tenancy or sell the property, the rules for ending a tenancy or selling a property apply. If you wish, you can issue a notice that you do not intend to continue with the tenancy after the end date in June. This can be issued between 90 and 21 days before the end
of the tenancy. - Jennifer Sykes