Q

With the new interest tax deductibility rule where emergency/state and social housing is exempt – do private homes rented to residential [tenants] that are paid by the WINZ benefit include this?

A

ABearing in mind that at the moment we have draft legislation only, I do not think that the rental of a house to a tenant who is in receipt of accommodation support from WINZ is going to qualify. The draft legislation talks about the property being owned by or rented to a social housing provider. This means if you are renting the property to the tenant directly who receives the benefit from WINZ, then the property is not owned by or rented to a social housing provider. It is important to acknowledge that these rules have not been finalised. However, as things currently stand, I do not think you will qualify for the exemption and therefore interest costs will be subject to the new limitations.

- Matthew Gilligan

Mortgage Holiday Interest Deductions

Q

I am a bit confused about deducting interest expenses for the period I was on mortgage holiday in 2021. I deducted mortgage interest as an expense in previous years, but I am not sure if I can deduct interest for the months I was on mortgage holiday. Interest was still accrued and added to the principal amount of the loan, so can I consider it “paid” and deduct interest for those months?

A

Yes, unfortunately mortgage holidays don’t suspend the interest charges, they only lift the requirement to make repayments. The interest is still considered to have been paid when added to the loan balance, so yes, subject to the new deductibility rules, the interest remains deductible despite the holiday.

- Mark Withers

Guarantor For Residential Lets

Q

We would like to start including guarantors in all our residential tenancy agreements similar to our commercial properties to cover the rent or any damage. Is this allowed and what wording would be appropriate?

A

The short answer is yes, you can have a guarantee or guarantor. However, in most cases a guarantee will not provide significant additional protection. Section 2 of the Residential Tenancies Act defines the terms guarantee/guarantor as “in relation to a tenancy, means a person who guarantees the performance of the tenant’s obligations, or who indemnifies the landlord against loss that he or she may incur in respect of the tenancy, or who assumes liability for the performance of the obligations of the tenant, and guarantee has a corresponding meaning”. In this context it is a third party who agrees to perform the tenant’s obligations if they do not. For a guarantee to be valid it has to comply with the Property Law Act 2007, particularly section 27. That section requires that a contract of guarantee must be in writing and be signed by the guarantor. This section must be complied with. If it is not the guarantee will not be enforceable. Very recently there has been a Court of Appeal decision about the enforceability of guarantees which is relevant to both commercial and residential tenancies. As a general rule, material changes to an underlying agreement will discharge a guarantor’s liability. That may mean if the terms of the tenancy change, the guarantee will no longer be enforceable. To avoid that scenario, a guarantee should allow for variations to the underlying agreement and prevent the discharge of liability. Guarantee agreements need to be carefully drafted to ensure they are both effective and enforceable. That leaves the final issue of why a guarantee may not be as useful in a residential context as it is in a commercial context. In a commercial context leases are usually entered into by a company, with the guarantor being a natural person guaranteeing the obligations of the company. For residential tenancies the tenancy will almost always be entered into by natural persons. For those natural persons, they do not need to guarantee their own obligations as they are principally liable and a guarantee cannot make them any more liable. The use of a guarantee in a residential context may be useful where family or friends guarantee the obligations of the tenant. If that kind of guarantee can be secured then it will be enforceable subject to the requirements of the Residential Tenancies Act.

- Shane Campbell

Granny Flat: Consents Required?

Q

What are the steps to ensure that an attached granny flat is in an adequate state for rental? Is there a Government department that undertakes checks? How do I identify whether any building consents are required if the granny flat was constructed prior to my purchasing the house?

A

There is no Government department that undertakes checks on behalf of landlords to confirm that a property can legally be rented. The onus for ensuring this rests solely on the landlord’s shoulders. Councils around the country have different rules around what may be permitted for the likes of adding a “granny flat” onto a residential site. I would suggest in the first instance that you make enquiries with your local council to ensure that the granny flat is permitted and that it has the necessary code of compliance. At the same time, it might pay to ensure that you will be allowed to rent it “on the open market”. I once owned a property with a granny flat in Christchurch. When I enquired with the council, I found that it was only permitted for occupation by an immediate family member of the main residence. Once you have established that it has the necessary consents, you will need to ensure that you comply with section 45 of the Residential Tenancies Act which relates to landlord responsibilities. If a property is found to be non-compliant it may result in a tenant receiving all, or a partial refund of any rent they have paid. Also, pay particular attention to your responsibilities relating to the Healthy Homes standards – insulation, heating, ventilation, moisture ingress and drainage, and draught stopping.

- Ryan Weir

Best Ownership Structure

Q

My partner and I bought our first home in August this year and will be renting it out as the location doesn’t suit our working arrangements. We will be looking at purchasing a new build under a company as it minimises our liability and has better tax consequences. I did previously look at LTCs but think a company would suit better. Can you share your expertise?

A

Unfortunately it is not possible to give a definitive answer to this query without further information. There are many factors that feed into the appropriate structure for a new purchase, including projected rental return, long-term plans for the property, whether there are other purchases planned, your personal income circumstances, intended borrowing structure, etc. What I can confirm is that if you buy a property that is classified as a “new build” then under the draft law as it stands at the time of writing, interest costs will be deductible until the 20th anniversary of the issue of CCC. This means if you buy such a property then there is a chance that it may run at a loss at least initially. Unfortunately due to the ring-fencing rules that were introduced a couple of years ago, you cannot employ an LTC structure so that any such tax loss is attributed to you and offset against other personal income. This does mean that the use of an LTC for property investment has declined, but there are always exceptions to every rule. As noted, there are many factors that feed into building the appropriate structure and I suggest you book an appointment with a consultant with all of the necessary information and arrive at an appropriate structure.

- Anthony Lipscombe (from GRA)