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: 

Changes announced in April 2021 by the government: 

• ​Bright-line test increased to 10 years (except for new-builds, which remain at 5 years); more info here
• amending the "main home" exemption which would require tax to be paid on gains
  made for periods the property is not used as the owner’s main home (a "change of use" rule).
• not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This will start from 1 October 2021, and will be phased in over 4 years for existing properties. There will be an exemption for newly built homes. More info here
• Ring-fencing rules applied to short-stay accommodation e.g Airbnb

​Note that this law is very much "being made up as they go along" so lots of things are unknown, or not even decided on yet.

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.

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!)

Fear not!  MBIE have provided this great checklist to work through:

Phase 2: Law changes to take effect from 11 February 2021

• Security of rental tenure: Landlords will not be able to end a periodic tenancy without cause by providing 90 days’ notice. New termination grounds will be available to landlords under a periodic tenancy and the required notice periods have changed.
• Changes for fixed-term tenancies: All fixed-term tenancy agreements will convert to periodic tenancies at the end of the fixed-term unless the parties agree otherwise, the tenant gives a 28-day notice, or the landlord gives notice in accordance with the termination grounds for periodic tenancies.
• Making minor changes: Tenants can ask to make changes to the property and landlords must not decline if the change is minor. Landlords must respond to a tenant’s request to make a change within 21 days.
• Prohibitions on rental bidding: Rental properties cannot be advertised without a rental price listed, and landlords cannot invite or encourage tenants to bid on the rental (pay more than the advertised rent amount).
• Fibre broadband: Tenants can request to install fibre broadband, and landlords must agree if it can be installed at no cost to them, unless specific exemptions apply.
• Privacy and access to justice: A suppression order can remove names and identifying details from published Tenancy Tribunal decisions if a party who has applied for a suppression order is wholly or substantially successful, or if this is in the interests of the parties and the public interest.
• Assignment of tenancies: All requests to assign a tenancy must be considered. Landlords cannot decline unreasonably. If a residential tenancy agreement prohibits assignment, it is of no effect.
• Landlord records: Not providing a tenancy agreement in writing will be an unlawful act and landlords will need to retain and provide new types of information.
• Enforcement measures being strengthened: The Regulator (the Ministry of Business, Innovation and Employment) will have new measures to take action against parties who are not meeting their obligations.
• Changes to Tenancy Tribunal jurisdiction: The Tenancy Tribunal can hear cases and make awards up to $100,000. This is a change from $50,000.

 
Phase 3: Law changes to take effect by 11 August 2021 (but may take effect earlier if the Government agrees)

• Family violence: Tenants who experience family violence will be able to withdraw from a fixed-term or periodic tenancy without financial penalty by giving two days’ notice and evidence of the family violence. If they are the only tenant, the tenancy will end.
• Physical assault: If a tenant physically assaults the landlord, owner, or agent of the landlord, or family member of the landlord/owner, and the Police have laid a charge against the tenant, landlords can issue a 14 days' notice to terminate a fixed-term or periodic tenancy.

Contact us for advice or call now

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? 

• What was your intention when you bought the property?
• What pattern have you established in terms of property transactions?
• Are you (and if so, how) associated with a developer, builder or property dealer?
• Will the Bright-line Test* apply?
• Will you be affected by rezoning?

​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:

• on or after 27 March 2021, and sold within the 10-year bright-line period
• between 29 March 2018 and 26 March 2021, and sold within the 5-year bright-line period
• between 1 October 2015 and 28 March 2018, and sold within the 2-year bright-line period.

Please note that the government has indicated that new builds will continue to be subject to a 5 year bright-line period. Before this can be legislated, what is considered a 'new build’ is still to be consulted on. The Government intends for the legislation to be retrospective so that new builds acquired on or after 27 March 2021 will continue to be subject to a 5-year bright-line period. More info here

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

 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:

• Increasing the small asset depreciation threshold to $5,000 for the period 17/03/20 to 16/03/21.  It will return to $1,000 for 2021/22 onwards
• Giving Inland Revenue the discretion to remit use-of-money interest (UOMI) for customers significantly adversely affected by COVID-19. Affects all tax payments due on or after 14 February 2020. (There are some conditions, see here for more info. For those who don't qualify; tax pooling is still a cost-effective option.)
• Increasing the provisional tax threshold from $2,500 to $5,000 i.e. if your 2019/2020 income tax was under $5,000, you are not a provisional tax payer for 2021 year
• Allowing 2% depreciation on commercial and industrial buildings from 2020/21. 
• Giving wage subsidies or leave payments in some situations.* Find out more HERE. 
• Business Finance Guarantee: loans for businesses with annual revenue up to $80 million can apply for loans up to $500,000, for up to three years. Click here for more info.
• COVID-19 small business cashflow loans:  10k minimum loan, 1 year interest-free, no repayments till year 3, then 3% interest p.a.  There are some fishhooks if you miss a payment, so be aware of your responsibilities if you apply and are accepted. More info here.  Apply via the IRD website (use your myIR account)

* 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

Are you thinking about buying a rental property but not sure if now is the right time to dive in?  

There’s nothing like a worldwide pandemic to give you wobbly legs at the thought of making a big financial investment! It may seem like a precarious time to buy a rental property due to Covid-19 and political uncertainty around landlord requirements. However, there are other drivers which may indicate that it is a good time to enter the property market or expand your portfolio.  Let’s take a closer look! 

Something to keep in mind when thinking about purchasing an investment property is any new and ongoing legal requirements on landlords. 

For example, the new healthy homes standards have been introduced for rental properties in New Zealand, to ensure tenants have access to warm, dry and safe homes.  These standards set specific and minimum requirements, including heating and insulation for rental properties. This means any property you purchase will either need to be up to specification when you buy it, or investment will need to be made to get it ready for tenants.

What records do you need to keep for your rental* property? Here is a general guide. Note that this list assumes you are using a property manager.  All costs are for the 12 months preceding 31 March:


​
RENTAL PROPERTY

• Copy of Sale & Purchase Agreement (if 1st year)
• Total Rent Received
• Insurances, e.g. Landlord Protection, Mortgage Protection, House
• Legal fees
• Property Management fees (if applicable)
• Rates – water and Council
• Maintenance, including any purchases e.g. heat-pump
• Rubbish collection (if you are paying for it)
• Property improvements (detailed invoices please)
• Any other fees or charges
• Sale and purchase agreement
• Valuation/s

HOME OFFICE
In our view, Home Office expenses can be claimed if you have rental property; however, as it is generally passive income (unless you are managing the properties yourself) we recommend a conservative claim, as follows:

• Telephone – please separate out the costs of line rental, internet and tolls
• Mobile phone costs
• Stationery, e.g., printer ink, pens, paper etc
• Visits to the rental property - please record the date of each trip you make to your rental property to check on it.
• Any existing (if not claimed before) or new business related expenses e.g., computer, cell phone, iPad etc. Include make, model, date and cost
• Any “home office” improvements (if in doubt, please keep records and we can verify these at year end)

MORTGAGE/S INFORMATION
For the rental property:

• Full bank statements for the 12 months ending 31 March
• Applicable interest rate
• Balance remaining on mortgages as at 31 March
• Any fees charged

If you'd like a downloadable copy, please see below.

Why keep good records? The better your records, the more expenses can be legitimately claimed, and the better the tax result is for you.  

* For guidelines on Business Expenses (non-rental property) please see this page.

​Other FAQs you might have:
USING ACCOUNTANCYONLINE.CO.NZ/MY TAX QUESTIONNAIRE
HOW DO I DOWNLOAD TRANSACTIONS FROM MY BANK'S ONLINE INTERNET BANKING?
WHAT IS XERO.COM?
WHAT'S THE PROCESS FOR MY TAX RETURNS?

The IRD provides a guide here under the heading "Deductions You Can and Can't Claim." 

Please remember, all advice given is to be taken in the light of our  disclaimer. Image courtesy of patpitchaya at FreeDigitalPhotos.net

You have a rental property. Can you claim your holiday as an expense? If you spend time travelling as part of your business you can claim business travel as an expense. A good way to prove the business portion of your travel expenses is by keeping a diary of your travels.

In addition to keeping invoices, receipts and tickets you should also keep details of:

• the date of the trip
• your itinerary
• the cost of car hire, and air, bus and taxi fares
• the cost of accommodation, meals and incidentals
• the time spent on business and non-business activities
• letters of introduction
• business contacts/cards
• firms visited
• business conducted/reasons for the trip/visit to firm

So how does the rental pay for my holiday?  
Well, the first thing is to remember that there is no such thing as a free lunch - or a free trip - unless you win a competition or have a wealthy benefactor!  However, there are such things as a tax-deductible trip, if not 100%, at least in part.

If you'd like to claim your holiday as a tax-deductible expense, then you need to

1. be visiting your rental property which is in your holiday destination on on the way to it
2. pre-plan all business activities related to it, i.e. set up your business appointments, e.g. real estate agents, insurance brokers, accountants, lawyers etc, before you go on your trip.  That makes it really clear why you are going.  Plus, keep records as per the list above.

Then, your LTC/trust/partnership etc can claim tax deductions for some or all of the trip and other necessary expenses: hotels, car, meals, travel etc. Note however that there are some gotchas:

That leather jacket is not tax-deductible
Let's say you are in Queenstown, and you see a nice leather jacket.  So, you buy it.  The trip is 100% tax-deductible, because it meets all the criteria above.  Can you claim the leather jacket?  No.  The guideline is "what is the nexus between this expense and the business activity?"  If there is no clear link or nexus, then the item is not tax-deductible. In this case, what does a leather jacket have to do with your rental property?  Nothing.  So it is clearly not tax-deductible. 

Don't go overboard with your expenses.  
Always remember that tax concessions allowed are based on what the hypothetical "reasonable" person would do.  A reasonable person would not eat out at the swankiest restaurant every night they were away.  They might do that once, but not every night.  So, don't get carried away.

Non-business parts of the trip are not deductible
Let's say that you arrive in another part of the country to inspect your rental property, meet with suppliers and possibly purchase another rental. You have a few days' worth of appointments set up, but you have planned to also take a few days to rest up as well.  The total trip is 10 days, with 3 days' business pre-planned, and the rest being vacation.  Therefore, you cannot claim the entire trip as a business expense. Instead, work out the proportion related to business (30%, in this example), and claim that percentage of the costs.

Can we claim for both of us then and the kids too?
Highly unlikely. Your children are likely not active working partners of your LTC etc, so you would have to make further adjustments to exclude costs related to their stay.  What about your spouse or partner?  Well, is your significant other a part of the business, e.g. a director of the company? A trustee of the trust (that owns the rental)? Are they actively involved in the taxable activities of the LTC? Is the firm/professional you are meeting at your destination expecting to meet both of you? Then likely yes you can claim.

Questions?  Please feel free to contact us.  And for clients, before you go away, please please please contact us. 

What are your options for managing your loan or mortgage during the COVID-19 outbreak?​

Depending on when you last fixed your loans, you may be able to get a lower rate now.  Look into what the bank's break fee would be (break fees are deductible on rental properties); chat to your mortgage advisor if the bank isn't playing ball.  Or if they are being greedy at a difficult time.

You might also be able to push the loan term out e.g. from 25 years to 30 years. Yes it will cost you more interest but will improve cash flow now by lowering repayments.

It's not really a "holiday", but rather a "payment deferral." How does it work? While you don't have to make payments during the mortgage holiday, you still get charged interest. What's that going to cost? Well, it could be significant. If your loan is 500k, then it could add about 15k to it (assuming 4% interest p.a.). If you didn't increase your repayments once the holiday is over, you'd pay about 35k more on your loan!

So, think carefully about this. One thing you can do is request the 6-monthly holiday, then if you don't need all six months, end the holiday and renegotiate.

As above, but you keep making payments as you can afford them.  This will give you some relief but reduce the interest on the loan.  Or save money, and then whack it on the loan when you go back to work/cashflow returns to normal. Achieves a similar thing.

Instead of paying principal and interest, look at paying interest-only.  There should be no break-fee for this at the moment.  Just keep in mind that if property values drop, you could end up owing more than the property is worth.  It has happened, but is unlikely.

You may be able to extend the term of your loan, which would lower repayments.  Of course, you will pay more interest in the long-term, but it will help immediate cashflow.

Inland Revenue have released the September 2019 Tax Information Bulletin (TIB), which clarifies 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

1. the LTC decides to apply the ring-fencing rules on a portfolio basis or on a property-by-property basis.
2. the shareholders have any other residential rentals with income/loss to offset against this

However, the answer is essentially, "Yes", if:

1. you have decided to use a portfolio basis for the LTC (that is spread the losses and profits out between the various properties owned by the LTC) 
2. you have at least one residential rental property held in your own name or in a standard partnership i.e. we are not commenting on "limited partnerships" here

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

• If an LTC applies the rules on a property-by-property basis, the shareholders have to also take that approach in their returns. If it applies the rules on a portfolio basis, ditto.
• This is not the case for partners in partnerships. If a partnership has filed a partnership return applying the rules on a particular basis, the partners do not necessarily need to apply the rules on that same basis. So a partnership now gives much more flexibility than the LTC in this one respect.

​
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 that yes, the rules are unchanged, and this still effectively meets IRD requirements for interest deductibility and remains a good strategy. 

However, just be aware that any losses are ring-fenced, as described above. 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