Living outside the tax rules.

Living outside the tax rules.

 9 months into the tax year we are starting to see some pretty horrific tax consequences for many landlords, but some are better at playing the game.

 For a quick recap on the rule changes, existing residential rental properties for the most part will lose the interest deductibility gradually over the next few years. There are a few exceptions, new builds are one of these. Being able to claim interest on a property investment is a significant portion of expenses for many landlords.

Many landlords are waiting for National to come back in office. The smart landlords are getting on with it and setting things in place. Some examples follow.

Although residential properties is a fairly broad category, the definition of disallowed residential is quite specific. If you have a boarding house, student accommodation or Air BNB then you step outside the net and can continue to enjoy life as usual. If not, It might be time to rethink what sort of accommodation you are providing.

New builds do not all look like modern clean lines. Perhaps you have an old farm house that needs rehoming, or better yet maybe it's time to officially split the 5 bedroom house into two 2 bedroom units. Both tick the boxes for a “new build”.

The interest might not be deductible on a residential rental. So maybe it's time to change things up and consider developing the property before selling off. You will still pay tax on profits, but this should give you time to get the money in the bank first.

Subdivisions on a property do not necessarily trigger brightline tax (provided you are outside of the 5/ 10 year rule). However, don't act surprised if you need to pay tax on the profit, especially if you are a builder.

There are no interest deductions for the old properties. However, you can still use it to secure a great  lending rate for that new commercial storage unit in Petone (if they ever get finished)

Most landlords separated their residential and commercial holdings. However, for those that have a mixed bag there is concession around apportioning the interest based on current market rates.

While you should not restructure to avoid paying tax (that's evasion). You may need to restructure for asset protection and if there's a tax benefit it is just a bonus. For example if there is transfer of a commercial building from a mixed group of entities into a trust (at market value), then the excess funds could be used to clear some non deductible rental debt.

When you decide to “upgrade”  your family home just remember if you have not lived in the property for longer then 12 months this can have a negative effect with regards to the brightline test. Make sure the records are in place (like a valuation for when you moved out) for what the true gain has been while the property has been an investment

This keeps coming up, stop buying houses for your children. You will attract brightline tax on the sale. It is best to provide a loan to the children and have them buy it, thus allowing them to claim the main home exemption.

Review your properties, if the cost (now and upcoming repairs) is going to be significant, drop it and clear the debt to make the properties cash flow positive sooner.

If all else fails  and you have a “new build” with the sky falling and the interests rising, its time to lose the asset. But don't forget the new build status is transferable and the interest is deductible for the next 20 years. Some real estate agents have clicked onto this, but best to remind them to make sure to catch as many buyers attention.




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