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Statement Compliance

Statement Compliance

Why do landlords who already provide Healthy Homes standards related statements in their tenancy agreements have to provide another such compliance statement from December 1?

By: Property Investor Team

30 September 2020

Q

We became first time landlords in October 2019 and made sure to include a statement (in our tenancy agreement) to comply with the Healthy Homes standards. Why is a new compliance statement now required by December 1, 2020, and is it possible that we only need one or the other as part of our records?

A

From July 1, 2019, in most new or renewed tenancy agreements, landlords must sign a statement of intent. This statement should provide the landlord’s intention to comply with the Healthy Homes standards.

From December 1, 2020, in most new or renewed tenancy agreements, landlords must include a statement of the property’s current level of compliance with the Healthy Homes standards.

For example, until July 1, 2024 (when all rental properties must comply with the Healthy Homes standards), some landlords may be gradually working to ensure their property complies.

The compliance statement will provide tenants with information about the rental’s level of compliance and inform them of work that still needs to be done. Landlords must also keep records of all documents that show how they are complying with the Healthy Homes standards.

More information about the Healthy Homes compliance dates is available on the Tenancy Services website at https://www.tenancy.govt.nz/he... healthy-homes-compliancetimeframes/. - Jennifer Sykes

Weighing Up Sale Options

Q

We are looking at purchasing another property to live in, but we’re wondering whether it is better to sell our existing property through a real estate agent, or to sell it to our look-through company (LTC), and rent it out? If we sell it to our LTC, how does this work with the bank? Can we reborrow money for the new home? Also, can we use the equity in our new home to then buy another rental property? (We are wanting to buy in Christchurch.) And can family live in the rental property we buy?

A

Good questions, which I’ll work through one by one. Whether you are best to sell the home or rent it depends on the numbers. What is the anticipated net yield? What are the capital growth prospects? Is this the best place for your capital, or can you get a better return elsewhere? If you do retain it, you will likely be best to sell it to your LTC (but get tax advice before proceeding). This will see existing bank debt re-documented with the LTC as borrower. It will also likely create an opportunity for some of the new borrowing required to settle the home to be structured into the LTC so that interest is deductible.

Subject to meeting equity and serviceability criteria, you should be able to secure borrowing for the new home against the old home once it is converted to rental use. Ideally, you should split your borrowing so that you use multiple banks, with the bank that has your home as security being different from the bank or banks that have rentals as security.

Again, subject to equity and serviceability criteria, you will be able to secure borrowing against the new home in the future to buy rental properties. Again, I would recommend implementing a split loan structure.

Finally, family can live in a rental property owned by you, but should be charged market value rent if you wish to claim all of the associated expenses as deductible. - Matthew Gilligan

Working Out Cash Flow

Q

I’m just starting to find out about property investing and I’m wondering how you work out whether a property will have a positive or negative cash flow? Please explain what I need to know about this.

A

What you are wanting to do is calculate the income from the property and then take away the expenses to find the cashflow position. Look to work off a net yield rather than the mistake that a lot of investors make which is where they work off a gross yield.

The difference is that a gross yield is just the annual rental divided by the purchase price. Whereas the net rental will take away expenses such as rates, insurance and body corporate rates (if a property is an apartment), which can give a better representation of the actual performance of the property.

You then want to factor in other variables such as potential vacancy, maintenance costs (older properties will generally require more than new builds as an example) and other costs such as property management (if you want to look at outsourcing this which I personally recommend). - Kris Pedersen

‘The 10-year acquisition period for builders runs from the point major improvements are completed, rather than from the date of acquisition’ MARK WITHERS

Early Termination Costs

Q

My tenant wants to exit their fixed term lease seven months early. I have not agreed to this, but they are threatening to leave immediately. Can I claim the bond to cover early termination, or do I have to wait until rent is overdue by 21 days before I can make a claim? I understand they are also in dispute with their power supplier and I expect that I will find other unexpected costs as well as re-advertising fees. How do I best recover my losses?

A

The bond belongs to your tenant, and you can claim it only to cover actual losses or costs. This can be done by agreement with the tenant (on a bond refund form) or by an order of the Tenancy Tribunal if there is a dispute.

When you argue the case before the Tribunal you will have to establish what costs and lost rent you are claiming for. The lost rent will be up to and including the day before the next tenant starts. Other costs (such as re-advertising fees) can be claimed at the same time. Be sure you have all your costs listed when you apply to the Tenancy Tribunal. Also, be aware that it is your responsibility to minimise costs, usually by re-letting as soon as possible after the tenant has departed. - Bernard Parker

Taxable Profit Considerations

Q

An elderly parent is gifting a house she owns to her three children at nil value. None of the three children will live in the property. One of these children is a builder (“the builder”).

If the builder makes extensive internal improvements (kitchen fix up, bathroom fix up) to the property and these are considered “not of a minor nature” under section CB 11, if the property is sold before 10 years, is the profit that is taxable the full sale price (because it was acquired at nil value)?

A

Good question. Firstly, to be considered a “builder” you must be in the business of erecting buildings. People often describe themselves as being a builder without actually meeting this definition. Secondly, adult children of a parent are not associated persons under the land taxing provisions.

That said, a person can taint a partnership they are a partner in, but to be a partnership you must be carrying on business in common with a view to profit. It is arguable that this activity does not meet the threshold of conducting a business together. Also, note that the 10-year acquisition period for builders runs from the point major improvements are completed, rather than from the date of acquisition.

Lastly, part FC of the Income Tax Act does deem a gift of property in these circumstances to be at market value. So if, for any reason, a disposal transaction were taxable a deduction for the market value of the property at the point of the gift would be available. - Mark Withers

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