Money vs Your Emotions: What You Need to Know! Amazing insights from Lynda the Money Mentalist!
What does Money have to do with Your Emotions? A lot! We discuss with Lynda Moore* how our relationship with money can lead us to make dysfunctional decisions, and how to address that. What things do first home buyers and property investors need to have in order before they approach the bank? Or the broker? There is loads of great advice in this excellent interview. And, look out for the financial reason why you and your significant other need regular date nights!
*Lynda is an accountant and has studied psychology. Contact Lynda via email@example.com or at moneymentalist.com
What investors need to know about cryptocurrencies: Risk and Taxes?
We discuss the big questions that investors need to know: Should your investment portfolio include cryptocurrency? Why? What are the risks? What about tax? If you trade one currency for another, is it taxable? What about if you mine? Is there any way to sell crypto and it not be taxable? And lastly, what about the accusation that cryptocurrencies are not eco-friendly? We find out the answers to all these questions, and more.
Inland Revenue released a Tax Information Bulletin (TIB) in September 2019, which clarified this.
For the purposes of this blog post, we are going to assume that the LTC or an individual only holds residential rental property i.e. no commercial, they are not a trader or an associated person or a developer etc, they don't have an Airbnb-style short-stay accommodation house in the picture.
Can losses from an LTC with residential rental property be offset against income from rentals owned by a partnership or in your personal name?
It depends on whether
However, the answer is essentially, "Yes", if:
So the result is, you can have a negatively-geared LTC, and given the above points, the losses can flow through to you as a shareholder. You can then offset this against profits from a personally-owned rental (either solely owned or in a partnership). The situation also works in reverse ie there are profits in the LTC and losses in the personal/partnership rental.
Note that you can't offset any losses against income from other sources e.g. wages, like you used to in the good old days. That is what the concept of "ring-fencing of losses" means. The losses are "ring-fenced" so that they only apply to residential rental property.
Some interesting points
Do restructure strategies such as selling your old family home to an LTC still work?
We have previously recommended this, in blog posts such as this one. The answer is now a big "no." Why? Changing ownership structures will now not shift/change non-deductible debt into deductible debt in any residential investment property scenario, including short-stay accommodation. For more info, see this blog article
For more info, the IRD Sept 2019 TIB is below
As always, situations vary, so please contact us for advice on your specific situation. Call 099730706 or email us here
With the government's shock introduction of laws slashing interest deductions on existing rental properties, where can you as an investor put your money? What will get you the best return while still maximizing tax deductions? We present 9 strategies:
SUMMARY OF CHANGES
Changes announced in April 2021 by the government:
HOW DOES THIS AFFECT ME?
At present, when you receive rents, you can offset expenses against that rental income to reduce the taxable profit. A big part of this is interest paid on the rental mortgage/s.
If the expenses are more than the income (a "loss"), the Ring Fencing laws mean the loss can't offset non-rental income, and the loss instead is carried forward to the next year. If you have two or more rentals, the loss from one property can offset the profit from another (depending on how your affairs are structured).
However, under these new laws, the interest deduction will (over 4 years) be reduced, then finally removed. Rental properties will make more profit, and for almost everyone: there will be a lot of tax to pay.
And of course, if you can't claim the expenses on interest, but still have to pay it... where does the money come from? You have to raise the rent.
WHAT SHOULD I DO?
Q: So what can I claim?
A: You can claim all the usual costs e.g. property management, repairs & maintenance, rates, insurance, legal etc. Re interest: It depends on timing. The following chart shows how much you can claim, depending on when you "acquired" the property:
Q: How do I work out the tax impact?
A: The calculator below will help you work out the taxable income. The exact tax depends on many things e.g. owned personally or via a trust or LTC? How much wages you receive etc etc. Note that this calculator assumes you already own/have "acquired" the investment property/ies.
Q: My rental was a new build. Does it still qualify as a new build under these laws?
A: Probably not.
Q: Is short-stay accommodation caught by the new interest deductibility limitations?
A: It would appear that mixed-use-assets (MUAs) - which are holiday homes partly used personally and which are vacant for at least 62 days in a year - are not caught by these new rules, but IRD specify this (at 2.33) "the Government considers it important that where a residential property could be used to provide long-term rental accommodation, the income tax treatment is the same whether the property is used to provide long-term rental accommodation or short-stay accommodation. Any income tax advantage provided for properties used for short-stay accommodation could reduce effective housing supply." In other words, it would seem that yes, it is caught. Just remember that this is all "draft" at this stage, so not actual law.
Q: When did I "acquire" my rental property?
A: For tax purposes, a property is generally acquired on the date a binding sale and purchase agreement is entered into (even if some conditions still need to be met). More info here. Note that for the purposes of the changes outlined here, a property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.
Q: My property sale will be taxable due to the Bright-Line Test (BLT). Can I claim the interest costs in that scenario?
A: No one knows. IRD say "The Government will consult on the detail of these proposals. Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of the sale."
Q: How do the "main home" changes work?
A: Actually, it reminds us a bit of how CGT works in Aussie. There is a great explanation at Stuff together with an example. (Thanks Stuff.co.nz!)
Your lawyer has possibly mis-advised you - although in good faith. Why do we say that? Well, here's a quick checklist before you start panicking:
The gist of it
Previously, the country's lawyers had advised people to gift no more than $54,000 per couple per year so that they wouldn't be accused of excessive gifting when it came time to be assessed for a residential care subsidy. If your assets come under certain figures the Govt. will subsidise your rest-home care. People generally gradually and cautiously gift their house to their trust so that anything they do doesn't stray into excess.
BUT! A recent series of court decisions, upheld all the way to the Court of Appeal, has now said
Gifts of more than $27,000 per year, per application made before the five year gifting period, may be added into the assessment. For couples, gifting is $27,000 in total – not per person.
See this page on the WINZ website for more info
What does this mean for you?
Here's what the Law Society of NZ said:*
The result of the High Court’s decision is that many people who have undertaken a gifting programme to a family trust may now unexpectedly find themselves ineligible for the residential care subsidy. This will come as an unwelcome shock to many. It will also likely cause many members of the profession concern at the prospect of claims from disgruntled clients for previous advice on gifting programmes.
The long and the short of it is that if you have already gifted more than $27,000 per annum to your trust, then this may now viewed by MSD as excessive gifting. (NB: If you have mirror trusts then you may be able to get away with $27,000 per trust per year). If you acted on legal advice, then I suggest you approach your lawyer about making a claim against them. The NZ Law Society makes this comment to lawyers:
Lawyers may wish to consider whether there is a need to notify professional indemnity insurers in respect of the risk of potential claims for previous gifting advice. Some brokers are encouraging practitioners to notify insurers of the risk of potential claims. Practitioners are encouraged to check their particular circumstances with their broker/insurer.
Note that lawyers throughout NZ advised people based on the then-understanding of $54,000 per couple per year, and so acted in good faith. But, at the end of the day, the advice has been misleading, as this recent judgement has shown. It's not pleasant for anyone.
Yes, but didn't the IRD change the law or something? What you might be referring to was the repeal of gift duty. What happened was that the Government passed a law change, meaning that you could gift your entire house to your trust, without incurring gift duty. Previously there was a limit of $54,000 per couple per year. Anything above that had gift duty applied to it. BUT (and here's the key point), the MSD's view of excessive gifting didn't change. If anything, it has tightened up, as explained above.
Residential Care Subsidy (WINZ)
FAMILY TRUST ACCOUNTING - WHAT DO I NEED TO DO?
TRUST LAW CHANGES NEW ZEALAND
What to know more? Call us on 0800 890 132 or email us.
* Note that the quoted blog post from the NZ Law Society is dated Jun 21, 2013, which was before the Appeal Court had made its ruling. This Court ruling confirmed MSD's view, as stated above.
See our three-video series:
SHAM TRUSTS: COULD YOUR FAMILY TRUST BE A SHAM?
COMMON RENTAL OWNERSHIP STRUCTURES
WHICH OWNERSHIP STRUCTURE SHOULD I USE FOR MY RENTAL PROPERTY?
And the following blog articles:FAMILY TRUSTS: BASIC CONCEPTS
FAMILY TRUST ACCOUNTING - WHAT DO I NEED TO DO?
COMMON MISCONCEPTIONS ABOUT FAMILY TRUSTS
Image courtesy of Idea go at FreeDigitalPhotos.net
The Residential Tenancies laws have changed. What effect does the "Healthy Homes Act" have on landlords? The Residential Tenancies Amendment Act takes effect in three main stages:
Phase 1: Law changes from 12 August 2020
I'm freaking out already
Fear not! MBIE have provided this great checklist to work through:
Phase 2: Law changes to take effect from 11 February 2021
Phase 3: Law changes to take effect by 11 August 2021 (but may take effect earlier if the Government agrees)
Is selling your home taxable?, Or in other words, do you have to pay tax when selling your home?
Buying and selling your private or family home typically is not taxable. However some are looking to purchase a family home with the intention of reselling it in time, and a few earn their income this way – buying and selling.
If you have established a pattern of purchasing and then selling your “family home,” this could be considered as property speculation or dealing for tax purposes.
So, how do you know whether you are considered a property speculator, dealer or wheer you are an investor?
How do you know if selling your home will be taxable? Think carefully about the answers to these five questions.
Q. Ok, so I just have to hold onto a property for a really long time and then I’m not considered a dealer?
A. No. The amount of time you hold the property is immaterial. It’s your intention at the time of acquisition.If you bought a property with the intention of reselling it, then any capital gain that you make on the sale taxable.
Q. Right-o. So, is there some sort of level? That is, my first couple of properties are tax-free and then I pay tax after that?
A. Ahhh… no. Again, it’s intention, patterns and associations – not numbers of properties sold.
Q. What period of Brightline Test applies to my house?
A. The bright-line property rule looks at whether the property was acquired:
Q. What about sub-dividing? Is that taxable?
A. That's a big subject. Contact us.
Q. Great. It looks like I might have to pay tax then. How do I figure that out?
A. Contact us.
* For more info see this link at Inland Revenue
What will the new tax rates in NZ mean for you? Now that the election is decided, there will be a new tax rate to deal with in 2021: 39% on personal income exceeding $180,000 per year.
These coming changes emphasize how important it is to have the right business and/or investment structures in place. There will be tax planning opportunities arising out of the difference between the trust tax rate (33%), the company tax rate (28%), the present top personal tax rate (33%) and the new top personal tax rate (39%).
If you would like a review of your tax position and structure, please complete the contact form below or call us on 099730706 line 2
WHAT CAN YOU DO?
1. MORTAGE HOLIDAY: In other news, with the OCR dropping to (and staying at) 0.25%, your bank should be passing on rate cuts for any floating loans, and it is worth looking at existing loans to see if you should break and re-fix or extend the term. Break fees are tax-deductible. Ask the bank or your mortgage advisor to do the calculations for you, or use this tool here. You might also want to look at a mortgage holiday, but just be aware that this will increase the loan,^ but it will buy you some time, so in the big picture, may be worth it. We suggest you only do this if you really need to.
Please see this detailed page with info about mortgage holidays, including links for all the major banks to apply for one. See also our blog post with 4 options for your mortgage to improve cash-flow right now
2. INTEREST RATES: Check with your bank re break fees on your loans, and look at whether the math adds up to break and renegotiate one or some loans at lower interest rates.
3. RENTS: Rent increases are worth considering, as you can now only increase the rent once a year.
4. PAYMENTS: Of course, cash-flow is king, and in this environment, we suggest asking your suppliers if you can start paying in smaller regular installments, rather than bigger sums. This will help reduce the impact of having less cash coming in. EpsomTax.com group offer interest-free time payment plans to all customers as a matter of course; please contact us to arrange this now.
5. INVESTING: This might also be the time to look out for housing bargains - see this article about timing and buying. If you can get a good deal on a cash-flow positive rental, that's going to introduce some $ into your portfolio. Heads-up: Banks are deluged with lending applications, so getting mortgage approval is slow
6. OTHER RESOURCES: Xero.com have provided a page with links to educational content. You don't have to be a Xero user to access all of it. Webinars include managing stress, resilience, business continuity and so on.
What good news is there for the coming weeks and months, in view of the COVID-19 pandemic and its effects on the economy?
Government policy changes include:
* The wage subsidy and leave payments are NOT subject to GST - an Order in Council was passed to treat it as exempt (Section 5(6E)(B)(iii GST Act). The wage subsidy paid to the employer is not taxable; it is excluded income under section CX 47 of the Income Tax Act 2007; it is also therefore not deductible when paid by the employer as part of wages to employees. The payments made to employees are taxable for the employee and subject to PAYE, KiwiSaver deductions, Student loan etc in normal way. The same is true for self-employed persons: it is taxable income. NB: you only need to show a 30% revenue reduction for a single 4-week period to receive the full 12-week lump sum; you should be able to show that you took active steps to mitigate the financial impact of COVID-19, which could include drawing from your cash reserves (as appropriate), activating your business continuity plan, making an insurance claim, proactively engaging with your bank or seeking advice and support from either the Chamber of Commerce, a relevant industry association or the Regional Business Partner programme.
^ How it works is that the principal payments temporarily stop and the interest is added to the mortgage
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!