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What are the implications if you have an LTC, now that Labour is aiming to change tax rules for rentals?

10 November 2017

 

WHAT ARE THE IMPLICATIONS IF YOU HAVE AN LTC, NOW THAT LABOUR IS AIMING TO CHANGE TAX RULES FOR RENTALS?

There are three parts to this:

Part 1:    If you have a negative rental, how will the possible changes affect you?
 
So at the moment you have an LTC, making a loss of $10,000 per year, and the loss is offsetting your personal income and you are saving $3,300 in tax each year.
 
The likely changes that Labour are suggesting will take some time to put into place, and then Labour is looking at phasing the change in over five years. 
 

  • Year ended 31/3/18 = likely no change and still $3,300 refund
  • Year ended 31/3/19 = likely no change and still $3,300 refund
  • Year ended 31/3/20 = Likely only 80% of loss can offset personal income, refund reduced to $2,640
  • Year ended 31/3/21 = Likely only 60% of loss can offset personal income, refund reduced to $1,980
  • Year ended 31/3/22 = Likely only 40% of loss can offset personal income, refund reduced to $1,320
  • Year ended 31/3/23 = Likely only 20% of loss can offset personal income, refund reduced to $660
  • Year ended 31/3/24 = Likely no loss can offset personal income, refund reduced to $0.


 
Part 2:    The losses will still be there and would be carried forward to future years where there was rental profit. 

So as your rentals change from negative to positive as you pay down debt, rent rises and depreciation deductions reduce over time, then you would not have to pay tax on the profits for the first few years!
 
In my opinion, investors should be concentrating on getting passive income from property long term.  Therefore, long term, property investors should be paying tax on profits, rather than being worried about whether they will get tax refunds from losses.  It kind of gives around five years for a property investor to get their ‘house in order’.
 
 

Part 3:    An LTC is probably still the right structure anyway. 

If the suggested rules come in, and are set up correctly by Government, then all structures will be affected.   So if you currently have an LTC, then it is likely to still be a good structure for you.   It’s important to always review your structure, but one of the best advantages of an LTC is its flexibility.   You can change shareholding long term as your situation changes.   Fox example,  initially you might have the shares owned by the highest earner to offset their high tax, but long term you might change to a Trust owning the shares to give asset protection and lowest tax on the income.   An LTC is also an easy entity to access capital gains!
 
If the government doesn’t set the rules up correctly (I’d guess a better than 50% chance), then keep an eye on my newsletters and facebook posts, as there is likely to be some clever ways to structure in the future!
 
 
So, overall at the moment, don’t panic.  If you are currently using an LTC, then it is likely to still be fine.   As the new rules become clear, then it would be worth having a free initial telephone chat with me for 5-10 minutes to check if you need to do anything further.  


Kind regards
Ross Barnett 

Commercial Property I don't think you should buy!

30 October 2017

Commercial Property I don't think you should buy!

Click here to watch my live video on Facebook.

 

Kind regards

Ross Barnett

I'm nervous.... No I'm Scared

27 October 2017

 

I’m Nervous…. No I’m Scared

The property market has already turned, or is showing signs of turning. LVR rules have had a huge impact, and I was getting set for a consolidation phase. My prediction was that the market would go flat, and that in 2-3 years there would be some desperate vendors, therefore some opportunities to pick up some bargains. I love this video showing what a new investor does at the peak of the market:  https://www.facebook.com/thepropertyaccountant/vide...

Now the game has changed a little bit more;

- 5 year brightline test. This personally doesn’t worry me, but the majority of property investors are after a quick buck. They want to buy a property now, it to jump up in value $100,000, and then to sell so that they can reduce their personal house loan, or buy a fancy car, boat , holiday etc. Paying tax on a property gain scares these investors.

- Tenant friendly. Everything seems to be going the tenants way at the moment, no letting fee, only annual rent rises, 42 day notice becomes 90 day. There is also a lot of tenancy tribunal cases going against landlord, and some landlords are having to pay some serious money back to tenants.

- Extra costs and compliance – insulation, smoke alarms and especially Health and Safety. Health and Safety is frustrating some landlords and also pushing up ‘Tradie’ costs.

I would guess that 65% of property investors have negative cashflow, that means the rent doesn’t cover all the costs. These investors then love and rely on their tax refund. I just did a quick cashflow of a standard rental that an average/normal investor would buy now. $550,000 and getting maybe $475 per week in rent, so just over a 4% gross yield. If the property is 100% mortgaged (this is pretty normal), it costs $10,600 before tax refunds!

That’s right – an average rental, that an average property investor buys now, is costing them $10,600 per year, before tax refunds.

And that is at 4.5% interest rates. What happens if this goes up to 6.5%? The loss moves up to $21,500!

Currently this average investor would be getting back around $5,000 in tax presuming highest tax bracket and some chattels to depreciate. So this brings the overall cost down to around $100 per week. Which is manageable to most investors.

How is this new or average investor going to cope with no tax refund – down $5,000 or another $100 per week?
Plus the extra compliance costs and hassle?
Plus if there is no capital gain for 2-5 years?

Then the biggie – WHAT IF INTEREST RATES GO UP? 1% would be another $100 per week.

Can the average investor survive an extra cost of $200 per week?

My thoughts from this;

- If you are conservative - Wait, watch and hope the market collapses. Then buy some bargains in ½ to 3 years, that have opportunity to add value, maybe through subdividing.

- If you are a little more aggressive - Same as above, but maybe some joint ventures, so that you are still doing things, but with lower risk. Also ensure the new purchases whether trades or holds, can cover themselves easily and don’t put you under pressure

- Aggressive – I just don’t think it is worth going there at the moment

- Buy in the bigger regions, such as Auckland, Hamilton, Tauranga and Wellington, where there is always buyers and tenants. Keep away from dying regions and little regions, especially if they rely on one industry. I always laugh to myself as each property cycle comes around and talk slowly moves to "lets buy in Tokoroa or Whanganui!"

My best advice at the moment, is take your time and don’t be afraid to get some advice and ask for help. Your local property investor association is a great starting place, and we also have some great information, checklists, webinars, seminars, video’s and blogs coming out over the next few weeks on strategy and how to get through the hard times if they come. Make sure you like our page or sign up for our newsletter to ensure you get the info!

If you have negative properties, think hard on how you can turn these into positive – a great starting place is a free 10-15 minute chat with me, where I can often point you in the right direction. Just email my PA, Mareese at This email address is being protected from spambots. You need JavaScript enabled to view it.. It’s completely free and no obligation!

What do you think?

Ross Barnett


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Claim your $1,000 back right here!

30 October 2017

 

Claim your $1000 back right here....

If you earn over $52,000 per year, then you are likely to have just lost $1,000 in tax cuts that National planned to bring in from 1/4/18.

How can a property investor get that back again?


1) Increase your rent. In simple terms it would sound like you need to increase rent $20 per week to gain $1,000, but after taking tax into account you actually need to earn around $29 extra rent per week!

2) Restructure – Over the last 10 years, we have found that the average restructure saves around $2,500 in tax per year, after taking into account any costs!

a. So can you borrow in your rental company to repay a shareholder current account?
b. Can you restructure a rental into an LTC, to make more interest on borrowing deductible?

Both of these need to be done correctly, for the restructure to work!

3) Rent by the room or fully furnished – Both of these will result in more rent, but they only work in certain places and it is important to make sure you can manage these kinds of properties and understand the tenants demand in the area.

4) Chattels depreciation

5) Make sure you are claiming all those small things. By themselves, each of these items is likely to be quite small, but added together they might save you $1,000 per year

· Mileage - For rental property associated travel you can claim 73 cents per km using the IRD rate or you can also use the AA rates which are generally higher. Make sure you have a simple system
· Donations - You can claim back 33% of any donations, as a rebate!
· A good system to account for all repairs, and all the little purchases


6) Insulation subsidies – If you haven’t insulated yet, talk to your property manager about insulation grants or subsidies. These can often reduce your insulation costs by $1,000

7) Kiwisaver – If you are an employee, then joining a super scheme or Kiwisaver makes sense. The government pays $521 into your Kiwisaver each year. Plus your employer matches your 3% contribution (3% of your income), less tax = approx. 2% extra contribution. So on a $50,000 income, you could be gaining $1,521 per year from the government and your employer

8) Renovation – An example from a property manager in Hamilton, was the landlord spent $25,000, and increased the rent $80 per week. A 16% return on investment!


Do you own a business, and also investing in property? Watch out for my next blog on “Maximising the benefits of having a business and property”

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Kind regards
Ross Barnett

How to get passive income from property?

6 November 2017

 

Check out my article for Waikato Property Investors Association - Have you joined yet?

 

How to get passive income from property! A must read on 5 different strategies. Have you joined your local Property Investor Association yet? With so many changes to property it is worth checking out the benefits at the bottom of the article! 

What is happening in the Auckland market?

6 November 2017

 

What is happening in the Auckland market?

The Median sales information shows that Auckland has been very flat over the last 6 months, but is still slightly above last year. At this stage it definitely hasn’t crashed!

What’s your prediction for the next 12 months?

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7 Mistakes Business Owners Make with Property

7 November 2017

 

7 Mistakes Business Owners Make With Property

 

Here is the list of seven items.  After this list, I have focussed on Points 1, 2 and 4 and included more detail and some diagrams to help explain the concepts further.
 

1.  Structure:  Often as property investors, we are looking at tax refunds versus asset protection.  Business owners can do so much better!

2.  Inter Entity Transactions: If your business goes bust, you don't want to lose your property investments too.

3.  I'll do it myself!  If you are a business owner, especially in the Trades (plumber, builder, electrician, etc), it seems easiest to mow the lawns yourself, or fix that fence yourself, or do the painting yourself.  You're saving money by not paying a contractor, right?
  

Often this is wrong, because as a business owner, you are often time poor.  So you already don't have spare time.

  • Often your hourly rate is higher.  If you are going to do work, then you are better to do it for a client.  Maybe earn $80 per hour for your trade versus only paying the handyman $50 to fix a few things.
  • What is your family life worth?  What is some time to yourself for fishing, hunting, or relaxing worth?  Yes, you could mow the rental property lawns, but it is also important to get a work/life balance.

4.  One Bank

5.  Not treating it as a business.  Property is not a hobby!

6.  Not understanding the numbers in business.  A business should:

  • Have monthly financial statements so that you know the monthly profit.  Xero or a similar program can help.
  • Have a Budget and a comparison each month between actual and budget.
  • Review its Balance Sheet at least quarterly and understand its current assets vs current liabilities.
  • Have a marketing plan.  This can be very simple and set out the major advertising over the year to avoid spur of the moment decisions.
  • Regular dividends to move profits through to the business owners.

 

7.   Make a fair profit for your work and then a business profit.  So for a small business, that might be a fair market salary or similar profit distribution of say $100,000 (you should be earning more than your staff!), and then maybe a $60,000 business profit.  Otherwise why are you doing it?  If you are earning less than your staff, there is a major problem!

More profit means there is more to invest in property to obtain more long-term passive income.

Click here to view some great videos that might help you, especially if you are a Trade business (plumber, builder, electrician, etc).


So now I'm going to explain the concepts of Points 1, 2 and 4 above further.

1.  STRUCTURE

As a business and business owner, you have risks.  You could be liable for Health and Safety.  Your business could go bust and you could have personally guaranteed creditors.  These are just two examples, but there are many ways you could be at risk.

Therefore, asset protection is very important.  Ideally you want your family home protected and separate to your business and separate to you.

Two common structures:



Structure B is the Rolls Royce structure.  It means if Trust 1 has to guarantee the Company lending as shareholder, Trust 2 is still separate and, therefore, the Personal Home is separate.  BUT, often banks will require a guarantee over the personal house anyway, which kind of undoes some of the benefits.  It still provides an added layer between the business and the personal house.

 

 

 

 

 

 

So how does this link in with property?  Expanding on Structure A, a standard property structure would be:






We would often make both companies LTC's.  Therefore the profit of the business (Company 1) would flow to the Trust.  The loss (or profit) from the rentals (Company 2) would also flow to the Trust.  The Trust would then be the central point that combines the profit and loss, and then could distribute to beneficiaries.  For example,  $1,000 to each child under 16 which normally has no tax, and distributions to a non-working spouse to use lower tax rates.

LTC's are easy to get the capital gains out of too!  Where as it can be a real pain and expensive to get capital gains out of a normal company.

This structure gives both asset protection and still an offset from the rental loss!

 

If money has been introduced or loaned to the business or rental, then this structure can be improved slightly.  The Trust could formally loan this money to either company, with a General Security Agreement (GSA) in place.  This should give the Trust a higher priority and more chance of getting its funds back in a worst case scenario.  If you are advancing money to any company, seek advice from your lawyer and they will be able to help protect it better!



2.  INTER ENTITY TRANSACTIONS

You have a business operated through a company and some rentals in a separate company.  The business has excess cash, so you transfer it to the rental company to reduce some debt.

 

ISSUE:  Now company 2 (rental) owes Company 1 (business) money.  So in a worst case scenario, you have been doing this for five years and now the rental company owes the business $100,000.  The business goes bust!  The rental company would have to repay the $100,000!

 

 

 


How could this be done better?



 Business profits flow down to Trust through dividends.  Then Trust lends to Rental Company.  This loan could be done with security too.

 

 

 

 

 

 



4. ONE BANK

Often it seems easier to have one bank, say BNZ.

BNZ has the loan on your personal house.
BNZ has the loan on your rentals.
BNZ has the loan on your business.

You have one Bank Manager and life is good.  Right?

WRONG:  If something goes wrong, then BNZ owns you.

Ideally, you want to separate into a number of banks.  As you get more and more rentals, then you should have multiple banks for your rentals too.  For Example:

BNZ - personal house in Trust
Westpac - Rentals
ANZ - Business.

Try to have no cross securities between them.  This way, if the business goes bust, you have one major issue to deal with, but at least your personal house and rentals should be separate.


Great Free Information

I hope this has given you some great information.  Make sure you like our Facebook Page as we are putting up some great videos and information for property investors!


Kind regards
Ross Barnett

What effect will the new Government have on property investing in New Zealand?

20 October 2017

WHAT EFFECT WILL THE NEW GOVERNMENT HAVE ON PROPERTY INVESTING IN NEW ZEALAND?

I’ve just done an 11 minute video on Facebook about the likely changes coming up, and what you should be concentrating on as property investors.  You can view this here. 
 
Next week, I will put my thoughts into writing, just in case you prefer a written version.
 
The big thing is not to panic!  I see the property market as already being flat, and I expect the property market to stay flat in the short term.  It’s a time to focus on property basics.
 
 
FREE STUFF
 

  • We have some free seminars coming up in a few weeks to ensure you are doing the basics, plus to discuss your strategy further:  “How are you going to get passive income from property?”
  • Videos – We have 5 new videos on Youtube that you will find very interesting.  All short and sweet!   Here's the link to watch these.
  • Property investment spreadsheet – for clients.
  • Trading property notes and tips – for clients.

 
I hope you have a great long weekend, and hopefully we will all get some sunshine!

Kind regards
Ross Barnett 

 

Why you should be paying Principal on your Rentals!

6 October 2017

Why you should be paying Principal on your Rentals!

 


Long term, do you want Passive Income from your rentals?

What is the easiest way to achieve this?

Obviously that is easy - it's to have no mortgage.  One of the easiest strategies to achieve passive income from your rentals is to make Principal and Interest repayments, and long term pay off the mortgage.  Sacrificing a little bit now, saving a little harder, and budgeting a little more, can have huge benefits later on and can really help to set you up for your retirement.


How is paying Principal possible? 

It’s human nature to spend all that you have available.  So if you earn $800 in your hand each week, the $800 per week will generally disappear.  Often people don’t know where their income goes, but because it's there, they buy little extras they don’t really need.  But if the net pay was only $750, you would probably still survive.  You might have a few less drinks, lunches and luxuries, but this would force you to manage your money better and adapt to having slightly less.  So, working on this principle, if you were to set up an AP for the $50 per week to go towards your rental to pay down some principal, then you probably wouldn't even notice the difference of a little bit less in your spending account each week. 
 
Over 10 plus years, the small principal repayments will add up to a lot.  You start saving interest on the loan your have repaid, so slowly the interest gets less and less.  Then you have more cash free, so can repay more in principal.  So its all about getting into this winning cycle.


Your available cash Increases

If you just allow the pay rise, finished loan repayments, or tax cut money to sit in your spending account, it’s going to disappear.  On paper you are earning more and have more cash, but you will naturally adjust for this and it will disappear on unnecessary extras.  So instead:

  • If you get a pay rise:  Work out the extra pay and increase the AP to your rentals or home loan to pay off the mortgage quicker.
  • If you finish paying off an HP or car loan:  Set up an AP for the same amount to your rentals or home loan to pay off the mortgage quicker.
  • On 1/4/18, if tax rates change:  Work out your extra net pay, set up an AP to your rentals or home loan to pay off the mortgage quicker.


But, but, but………… the “tax benefits”

I hear this comment all the time.  Yes, it is a slight benefit to pay off your personal home loan quicker.  But most of the time the money just gets wasted and doesn’t go to either the home loan or the rental.  Also the tax benefits are often tiny.  I looked at this in more detail in my 21/3/17 blog, and on a $500,000 rental loan the difference in tax was only $292 per year approximately over five years!
 
Hopefully this helps you to pay off your rentals and obtain passive income long term!


Coming into Coombe Smith offices to see us?  There is now 2 hours FREE parking available on both sides of the road outside our building.  Thank you to Hamilton City Council.  

 

 

 

 

 

 

 

 

 

 



Kind regards
Ross Barnett 

Choosing A Property Accountant

28 September 2017

 

Choosing a Property Accountant.

It doesn't really matter where your accountant is. These days, with emails and Skype, it's often easier not to have a local accountant! Here are the things you should look for:

 

1)  True property accountant.

The easiest way to tell this is to visit their website. If the website is all about property - great. But if it is about business and farming, etc, etc, then they don't specialise in property and might be missing some tricks!

 

2)  Don't go for a one person firm.

A tiny firm often doesn't have all the resources they need. Plus if they die, are sick, go on holiday, how do you get your information? Back ups systems can be hopeless, and how does a single accountant review their own work? (Good firms generally have a double review process!).

 

3)  I personally don't like large firms either, as you often deal with the junior.

 

4)  A Chartered Accountant is generally better as they have compulsory training each year and many years of university and practical experience.

 

Good Luck with your choice.

Ross Barnett

The Property Investor You Don't Want To Be

26 September 2017

Last Friday I released my latest video The Property Investor You Don't Want To Be.  Over 2,000 people have already viewed this video on our Facebook page over the weekend.  If you are thinking about buying a rental, you need to watch this video first!  Only 14 minutes of your time and it might save you from making a big mistake.  Click here to view this video.

Feel free to share the video link with friends and family who are thinking about getting into property investment as it will be very useful for them.

Following on from the election here are my thoughts:  Why not National and Labour?

Rather than political games, why don't the two main parties work together for a better NZ? If you take the best of both parties, the end result could be quite good. They could focus on:

1). Reducing Government overspending

- Start with lower MP salaries
- Reduce the number of MP's by 25%
- Reduce the number of MP's advisors by 25%
- Reduce MP's perks, travel, superannuation and other costs by 25%.

2). Bring in Labour's 5 year Brightline test, to make property speculation harder. With this, the number of personal home exceptions could also be reviewed, as currently this gives a loop hole to be exploited.

3). Currently there is an incentive for people on a benefit to have more children. Maybe try a new strategy, as the current one isn't working.  Perhaps an incentive for people on a benefit not to have children?

4). Still have the tax cuts that National proposed!   The higher income earners already pay a higher percentage of NZ tax, and with the country surplus increasing, it is fair for some of this to go back to those who pay the majority of tax. AND, many of the tax refund recipients will spend the extra $1,000 on luxuries which then creates more money for small business's, leading to more wages, that leads to more overall spending in the economy.

5). Establish a new rule for future elections to stop Political Parties buying votes with last minute election promises.

6). Review the major items discussed during the election such as clean waterways, lower immigration, and more support for those less fortunate, and work together to improve these.

I personally don't think any of the Political Parties is that great, but maybe with the two major parties working together, rather than playing games, the country could be in a better place in 2-3 years time. Also over 80% voted for either of these parties.

What do you think?

Kind regards
Ross Barnett 

What would you do if you won $30 million?

18 September 2017

Hopefully you are the lucky person sitting there, wondering what to do after winning the $30 million Lotto last weekend.  The ideas below also apply to anyone who has come into a reasonable amount of cash, whether through a Lotto win, inheritance, a lucky property transaction or some other means.

What would I do if I had won $30 million over the weekend?  In my mind, the first 3 steps are imporant:

Step 1 – Don’t tell anyone.  Not your friends, family or anyone.  Keep the information to yourself and give yourself a chance to comprehend the win and what you will do with it.

Otherwise suddenly you will have 500 more friends, and your close family will double or triple in size.  They will all be trying to give you ideas and tell you how much they need help.

Step 2 – Pay off all debt.  Pay your home loan off, credit card debt, and all other debt.  This is a safe use of the money.  If needed, you could always borrow again later against these assets, but with $30 million your main issue will be having too much money.

Step 3Create some breathing room and stop rash decisions.  Tie up your money for 3 months, so that you have time to think rationally.

With the money left after Step 2, portion off some ‘fun money’.  You have just won $30 million, so you are bound to want a few extra dinners out, stay in some fancy hotels and maybe have a holiday and buy some cool clothes.  Maybe $200,000?

Split the remainder between 4 or 5 major banks – chat to each bank, but with $5 million or more, you should be able to earn 3% or more per annum fixed for 3 months.  Get the interest paid out monthly to a separate account, or into your ‘fun money’ account.  And get the interest taxed at the top tax bracket of 33% to make things simple.

The whole idea is to slow you down!

  • Don't rush out and buy your dream car (boat or plane) tomorrow.  Chances are that with the $30 million win, your dream car would have changed.
  • Don't help anyone immediately.
  • Don't buy a property, whether a personal home or beach house or investment.  With $30 million, your ideal personal home or beach property will probably change!

At only 3% interest, you will still be earning $50,000 per month after tax is deducted.

 

Step 4 – Planning for your Future

The planning part can be done in the first three months, but I would delay actually committing to anything within the first 3 months.

A)  Set up a Trust with a good lawyer.  A Trust is designed to protect your assets, and now that you have $30 million, you have a lot to protect.

Make sure you go through the whole process with the lawyer, such as transferring any relevant property into the Trust, having an independent Trustee and completing full gifting.

 

B)  Set selfish goals.  Decide how much you personally need/want:

  1. What luxuries do you need, and how much cash do you need for these?  This might be the mansion in the country, the beach house, the cool boat, and the fancy car.
  2. How much income do you need a year?  How much do you want to earn a year, and how much cash do you want available?
  3. Decide how much extra buffer you want to have?  You are unlikely to win $30 million again, so you want to make sure you are set for life.

Pay for advisory meetings with two or three different financial advisors, and look at what investments you could make and the income they would give you.

Remember the golden rules of investment:

  • Don't put all your eggs in one basket.
  • The higher the return, the higher the risk.  With $30 million, you probably don't need to take any risks, so you could probably look at safer, more conservative investments.

 

C)  Helping others:

  1. Make a list of who else you want to help.
  2. Work out how to best help them.

There are different ways to help people.  The obvious is to just give your friends and family money.  If it was me, I would keep away from just giving capital (your $30 million winnings) and I would prefer:

  • Loaning money.  That way, if their relationship breaks up, you can get the loan repaid.
  • Invest the money under a separate Trust, and then distribute the income to those you want to help.  This way you maintain the capital and are just giving the income.
  • Set up Trusts for each person you want to seriously help, and control the Trust for them (or get advisors to help).  It could hold investments for them and help them get further ahead financially.

Hopefully you are the lucky person who has just won the $30 million, and this has given you some great ideas!

Kind regards

Ross Barnett

 

Labour Update - New Taxes and Lies?

14 September 2017

 

LABOUR UPDATE - NEW TAXES AND LIES?

I've been away at my best friend's wedding for two weeks and it is amazing what a change there has been.  I wrote my initial blog on Labour's policies in May 2017, with National polling 43% and Labour at 30%.  On Tuesday, when I started to review any new Labour information, Labour was 43% and National was behind on 39%.  Obviously this is just one poll and other polls will show different results, but overall the election is going to be a lot closer than it appeared in May!

Comment from Jacinda Arden on Tuesday - Completely wrong!

"The fact that someone who works a 40 hour week pays tax and someone who flicks four investment properties and doesn't in the same way - that's a question of fairness."

Facts:

  • People who trade properties (flip) have to pay tax on the profit.  The relatively new Brightline Rules make it almost impossible to not pay tax on trades.  But before the Brightline Rules, a trade was taxable under the 'intention rules' anyway.  So a person who trades four properties per year is taxable on this profit and always has been.
  • A trader who trades four properties per year would also have to pay GST.

I liked this comment from Mathew Gilligan on a property forum:  "Either she knows this is incorrect and is lying to the public (unlikely) or she is ignorant of how the tax system works, making her incompetent.  Which is it?  She is plain wrong."


Land Tax

This is something that Labour won't rule out, so is possible.

In my opinion, this could be very scary for property investors.  The worst part is the unknown.  Could it be $1,000 per year or $20,000 per year?  Most likely it would be a percentage of land value, but what %?

I feel that property investors need to focus more and more on cash flow, and the aim of most investors, at some point, is passive income.  Paying a land tax each year is going to hurt a lot of property investors and either force rents to rise or property investors to sell.  Long term investors who have worked hard and struggled into a good position of low debt on rentals, could suddenly find their passive income disappearing and their retirement plans ruined.

The Rich Should Pay More Tax

Currently anyone who earns over $90,000 is in the top 11% of income earners.  This 11% of earners pay 48% of the national tax!  If we round the figures a little, 10% of people are paying 50% of the tax.  Should higher income earners really be paying more tax?

If you earn over $40,000, you are in the top 42% of income earners, and this 42% of income earners pay 85% of the national tax!

Source:  http://www.treasury.govt.nz/budget/2017/at-a-glance/b17-at-a-glance.pdf



Making life better for renters

  • Extending Notice period from 42-90 days:  Current period is 90 days anyway, unless certain exemptions are met.  The two main exemptions are:
    • Selling
    • Owner or family member going to live in property.

So, it will make it harder to sell with "vacant possession" or harder to move back into the property for your own use.

  • Limit rent increases to once per year:  current law allows once every six months.  It would then become important to make sure rent increases are done regularly and that rent is kept up to market rates.  Otherwise, it could take a while to catch up.
  • Letting Fee:  Labour is planning on banning Letting Fees from being charged to tenants.  The cost of letting properties will still exist, so this cost will either be worn by property management companies, or be paid by landlords, or landlords will long term try to cover by increasing rents.


Capital Gains Tax

Labour plan to hold a working group to work out the best tax changes going forward.  From Jacinda's comments, changes are likely to occur within the first term.

Past Tax Working Groups have suggested Capital Gains Tax.  So there is a reasonable chance that, if Labour are elected, a Capital Gains Tax would be implemented.

As with any tax, 'the Devil is in the Detail'.  Until the details have been finalised, we cannot be certain how this would be implemented.  Based on tax policies in the past, such as the Brightline Rules, any new Capital Gains Tax would only apply to new purchases from a certain date.  It would also take the Working Group, Labour and IRD a while to finalise any Capital Gains Tax.

I would hope that any Capital Gains Tax wouldn't apply to existing properties.  Otherwise this could cause a large number of investors to try to sell some rentals before the policy came into effect, creating a large over-supply of properties for sale that could have a major impact on the sale prices.

Overall:  The main thing to remember with any Capital Gains Tax is that it is only payable if the property is sold, and at this point, you should have the cash available to pay any tax on the capital profit.


Inheritance Tax and using a Working Tax Group

Jacinda's comment says that "inheritance tax is off the table."

The two parameters for her Working Tax Group would be:

  • The family home is not allowed to be taxed.
  • Inheritance tax is off the table.

It's interesting that Labour is looking to use a Working Tax Group to establish the best tax changes, but then not giving them full freedom to look at all the options.  I'm not saying the family home should or shouldn't be taxed, or that inheritance should or shouldn't be taxed.  However, if you are going to review the tax system, surely the group reviewing it should have complete freedom to look at all the alternatives and recommend the best solutions for the country.

Currently, I'm very concerned about any Working Tax Group as the outcomes will largely depend on the criteria given to them (what else will be taken off the table?) and also who is on the Working Group.


Growing the Building Workforce but Cutting Immigration

"5,000 new jobs at its peak" for the construction industry.

New Zealand's current unemployment rate is 128,000 or 4.8%, which is the lowest since 2008!  Labour also plans to reduce immigration by 20,000 to 30,000 per year.  Fourteen to twenty thousand of this immigration is work related.

With unemployment already low, and with low immigration, I'm curious where all these extra people will come from?


Overall I have tried to show the possible policies and taxes that could affect property investors if Labour gets in.  I have not written about National as their policies are already in place, and in past blogs over the years, I have written about the changes they have made.

We welcome any comments on our Facebook page about this blog - Click here to go to our Facebook page.


Kind regards
Ross Barnett 

Negative Gearing - What is it and how does it work?

29 August 2017

NEGATIVE GEARING - WHAT IS IT AND HOW DOES IT WORK?


This blog was written by David Kneebone of Lodge City Rentals (www.lodge.co.nz/Property-Management).  David has kindly allowed me to share this with you. 




 

 

 

 

 

 

 

If you're new to the world of property investment, you will likely have come across the term 'negative gearing'.  It's often in the news, controversial and sounds quite fancy.  But what does it actually mean?  Here is our introductory guide to negative gearing.

What is negative gearing?

Negative gearing is the approach of borrowing money to lose money, usually in the short-term, with a view to making it elsewhere.

In the property investment sector, negative gearing relates to the expected income earned by a property not being enough to cover the costs of owning and managing it.  However, the investor intends for this loss and will make up for it elsewhere, for example with a reduction in tax.

In concrete terms, it's like buying a rental property and renting it out for $30,000 a year, but needing to pay $35,000 a year for interest, rates and other expenses.  The owner can then get a tax deduction on the loss, which is seen as an incentive to invest in housing.

A property may be negatively geared at the start of the ownership, but as rental income increases the property can go from being negatively geared to positively geared.

How does it work?

Let's say a person earns $100,000 a year in their job, and has a rental property making a loss of $5,000 a year.  When it comes to the end of the tax year, that person is taxed on $95,000 income overall.  The loss on the rental property reduces their income by $5,000, and thus reduces their overall tax bill by $1,560.  It's perfectly legal, but controversial because, in effect, other taxpayers end up subsidising their 'poor investment'.


What are the advantages of negative gearing?

  • Ability to borrow more:  See example above.  If you're disciplined with your investments, negative gearing is one way to offset cashflow losses in the short-term.  This enables lower or middle-income earners to invest in property, which they would not be able to afford otherwise.
  • Take advantage of capital growth:  Besides tax savings, arguably the biggest benefit of negative gearing is that it can allow an investor to afford to buy a property with the potential for high capital growth.  Capital growth potential is the most common goal of property investors.  Negative gearing allows you to more easily afford some properties that will increase in value in the future.
  • Better quality investments:  Negative gearing can open up the range of properties an investor can afford to purchase, including properties where the rent would not necessarily fully cover the mortgage and expenses.  This can potentially allow an investor to invest in safe, secure areas that are likely to provide regular rent, which is a sound investment strategy, or to invest in high capital growth areas.


What are the disadvantages of negative gearing?

  • Rules can change:  Your investment strategy is based on a set of rules which can be changed.  The revocation of building depreciation is a good example and this has lessened the benefits of negative gearing significantly.  The fact that you can't control this change means negative gearing is a real risk.
  • Risk:  Borrowing money to fund a property comes with the possibility of rising interest rates and depreciation in the value of your property, which can eat away at the potential capital gains.  Many people incorrectly assume negative gearing is a fool-proof strategy to "save money" on tax.  No investment strategy can be called "fool-proof" or "safe", and significant losses are possible if the investor underestimates the amount of loss they are making on their investment.  Most people embark on negative gearing to achieve capital gain, but there are no guarantees.  Capital gains are not steady or certain, and you may end up without appreciation in value with negative cashflow.
  • Higher debt levels:  Negative gearing can help more people afford more properties, which can drive up house prices.  There are also the unforeseen costs of property ownership which have the potential to make a slightly negative property very negative.


An example of capital growth from negative gearing

Imagine you bought a $440,000 property and took out a $400,000 loan at an interest rate of 7%.  The annual interest payable on the loan is $28,000.

Now imagine you are earning $430 per week in rent, which adds up to an annual rental income of $22,360.

Based on the above example, you are paying $28,000 in interest but only earning $22,360 in rent, which means a shortfall of $5,640 per year.  That's the bad news.

The good news is the property should be going up in value and will be worth more as time goes on.  If the property went up in value by 10% in a year, it has increased its value by $44,000.

At the end of one year, you have paid out $5,640 in interest but the property has increased in value by $44,000, which means you are $38,360 richer than you were 12 months ago.


A change to the depreciation rules

In 2010, changes were made to the rules around depreciation.  Where previously property owners could take three percent of building costs as a tax loss, the change has now meant it is no longer possible to depreciate buildings, thus making negative gearing harder to achieve.  It could be said that the golden days of negative gearing are over.

However, the approach to negative gearing does bring about the discussion of good debt vs bad debt.  While negative gearing may encourage people to borrow more, it can be argued that servicing an income-producing asset is good debt in the long run.

Negative gearing could be the determining factor as to whether an investment is good debt or bad debt.  Is your property making - or not making - a return?  And can you make a previously negatively geared property cash flow positive?  If so, it could be the answer to turning an investment into a winner.


The future of negative gearing


Labour have announced a plan to phase out negative gearing over the next five years in a bid to dampen property speculation and help first-home buyers go up against property investors.

The Property Investors Federation has opposed removing that incentive, saying it could result in a shortfall in rental housing stock.

At Lodge City Rentals, we'll be keeping a close eye on these changes.  In the meantime, if you have any questions about negative gearing and how it could affect you, get in touch with the team today.


(Source:  http://blog.lodge.co.nz/negative-gearing-what-is-it-and-how-does-it-work)


I hope you have found David's blog interesting and useful.


Kind regards
Ross Barnett 

 

So what is really happening in the Hamilton Market? Have we crashed?

22 August 2017

So what is really happening in the Hamilton Market?  Have we crashed?


There is so much talk in the market about property crashing!  When I was putting together the most recent Hamilton information, I was actually expecting the Hamilton Median Sale Price to be down slightly, and for there to be a downward trend.

Well, there isn't.

The graph below shows January 2017 to July 2017 as being very flat.  The peak last year was November 2016 at $527,000, and July 2017 is slightly above at $531,600.


Graph

 

 

 

 

 

 

 

 

 

 

 

 

It is very interesting to note that January 2016 was $388,000!  So in 18 months, there has been an increase of $143,600 or 37%!  Wow!

My pick for December 2017 is that it will be very similar to December 2016 and around $525,000.  Obviously I don't have a crystal ball either, and it is always very interesting to see how close I get.  The big factor that could change this for me is the LVR rules.  I think it would be crazy to remove these.  But if removed, that would likely cause a mini boom, so therefore, would throw my prediction out the window!

Do you have a strategy for a flat market?  What will you do if interest rates go up and there in no major capital gain in the next few years?  This email address is being protected from spambots. You need JavaScript enabled to view it.  or give Mareese a call on (07) 839 2801 to make a time for me to have a quick 10 minute free telephone chat.


Kind regards
Ross Barnett 

 

 

 

Do You Need a Trust?

4 August 2017

 

DO YOU NEED A TRUST?


What Do You Want a Trust For?

Relationship Property?  A Trust isn't bullet proof and you would need to get some expert legal advice around relationship property, and most likely have a relationship property agreement too.
 
To save tax?  For most property investors, a Trust will be less tax effective, as any losses stay within the Trust and cannot offset personal income (so no tax refunds).  For business and property owners that are making a real profit after a fair owner wage, a Trust is a great entity to spread income to other beneficiaries and minimise tax.

 
The main reason is asset protection.


 

 

 

 

The first part to consider is what are you protecting your assets from?  What is your or your partner’s risk of being sued?  I look at:

  • Director risk:  If you are a director in a company (such as a finance company, for example), then you have director responsibilities and risk.  In a worst case scenario, you could be sued as a director.
  • Trustee risk:  Are you a Trustee in another person's Trust.  If so, you could be liable as Trustee.
  • Have you given personal guarantees?
  • What is your potential risk to Health and Safety?  If you are in the construction industry, this could be quite high!  And it's not just owners who can be liable.  Any employee could be held to be liable.

 
You need to consider these items and any others that might affect your risk or your chance of being liable.


 

 

 

 

If you have high risk, then a Trust would help to separate your assets from your risk.  Generally, this would mean putting your personal home in a Trust to start with.  For investment properties and businesses, you need to consider the structure carefully and there can be lots of catches or costs to restructure. 
 
Setting up a Trust is only part of the process and you need to be aware of the ongoing administration and compliance requirements:

  • New Trust laws (due to come in late 2017 or early 2018) setting higher obligations on Trustees.
  • Normally you would have an independent Trustee.  We charge $75 + GST per year for this service. 
  • For signing of documents as Trustee (e.g. Finance documents), we charge $75 + GST.
  • If we are a Trustee, we require a compulsory annual meeting, normally done by phone.  We charge $100 + GST for this phone meeting.
  • Gifting.  We charge $255 + GST.
  • Annual Financial Statements, Minutes and tax returns for the Trust.  This can vary widely depending on the work required, but is likely to cost at least $500 + GST per year.
  • Trust Minutes and discussion for major transactions.
  • Separate Trust bank account and keep Trust affairs separate to personal.

 
Setting up a Trust is done through a lawyer and normally costs $2,500 to $5,000 depending on what is included and what property needs to be transferred into the Trust. 
 
In my opinion, when should you be looking seriously at a Trust?

  • High risk as above
  • Profitable business making $50,000 or more after fair owner wages
  • Profitable rentals
  • As your overall equity builds up to $1million plus, it is worth considering Trusts as you have more to lose.

 
I haven't put these items here as a 'sales pitch', but I hope they give you a realistic idea of the ongoing costs for a Trust and that all the little things can add up! 


FREE STUFF

If you are a paying client of Coombe Smith, we have some information which we can give you for FREE:

  • A list of Five Stategies for property investing
  • A list of expenses you can claim
  • Simple Spreadsheet for rental cash flow
  • Simple Spreadsheet for trading properties
  • Trading property notes, including information on GST and zero rating
  • Rental Property Basics Seminar Video
  • Advanced Property Investors Tricks and Tips Video.

This email address is being protected from spambots. You need JavaScript enabled to view it. if you would like to request any of these.


Kind regards
Ross Barnett

Do You Have Spare Land?

27 July 2017

 

Do You Have Spare Land?

If you have an older house on a large section, or are looking to buy a new section, it is worth considering Duplexes.

I think they look a little ugly, but from a financial perspective, Duplexes should allow you to get more income from the land, thereby maximising your return.

With a shared wall, the building costs should also be less.

Click here to read a recent article from Stuff that you might be interested in.

 


Do you have another accountant and wonder if you are getting the best accounting advice?

  • Are you getting the best accounting advice?
  • Are you claiming illegal expenses?
  • Are you missing major deductions?
  • Do you need to look at restructuring?


If you have another accountant who does your rental property financial statements and tax returns, we have the perfect offer for you:

We will review your financial statements and tax returns for one entity (this can be your 2016 accounts) for $100 GST inclusive.

If we can’t find a major error, or major area to improve, then it’s FREE!

(If you have multiple entities, we would first need to see what is involved, but most likely the cost would be$100-$200).

I’ll personally be looking at your financial statements, tax returns, and overall financial position.  In lots of cases I can see opportunities to legitimately save thousands in tax.  At the end of the review you will get a letter outlining any major errors or issues that I can find, or opportunities that most likely need exploring further

Please note: This is just a Review.  Therefore it does not provide solutions on how to fix the errors or issues identified and that would have to be explored or expanded on later. 

Our aim is to show you how great we are, so that you then want us looking after your accounting and tax needs.   But there is no requirement to change to us.

Want to go ahead?  Email your last year's Financial Statements and Tax Returns to This email address is being protected from spambots. You need JavaScript enabled to view it..  We will come back with:

  • An exact price if you have more than one entity
  • The extra information we require.


Kind regards
Ross Barnett

Overseas Case Studies and Examples

21 July 2017



 

 

 

 

 

OVERSEAS CASE STUDIES AND EXAMPLES

 

Joe is from the UK and has moved to New Zealand in April 2012.   

CASE STUDY ONE:

Joe has a rental in the UK.  Does he need to return the income in New Zealand?
 
The general answer is yes.  Once Joe becomes a tax resident in NZ, then he needs to return his world wide income in NZ, and pay tax on this in NZ.  If Joe is paying tax in UK on the rental profit, he will get a credit for this in his NZ tax return.  But if Joe is paying a higher tax rate in UK, then he will still only get a credit for the NZ tax due, i.e. if paying 40% tax in UK, but only 33% in NZ, then will only get a credit for 33% in NZ.
 
4 year exemption - There are some restrictions such as no Working for Families, but in general, if you have just moved to NZ for the first time, then there is a 4 year exemption on foreign income:

  • so for the first 4 years, Joe doesn't have to return the UK rental income in NZ.
  • After the 4 years, Joe will have to return the UK rental income in NZ.

 

CASE STUDY TWO:

Joe contracts back to his old employer in the UK.  They pay him his normal salary, to his UK bank account with UK withholding tax deducted.
 
It is 2013, so still within the 4 year exemption.  Does Joe need to return this income in NZ?
 
Yes, this is still taxable in NZ.  The 4 year exemption does not cover income earned for personal services.
 
Most likely in this case, there should be no tax deducted in UK, and NZ would have the sole taxing rights.  So if you have a situation like this, it is important to get the tax right at the start, otherwise you could be double taxed!
 

CASE STUDY THREE:

If you are currently receiving a monthly pension from overseas, the pension is fully taxable in NZ (Presuming you are a NZ tax resident).
 
Say it is $10,000 that you receive each month.
 
Some tax payers have changed their monthly payments to an annual payment.  So following the example above, that would give an annual payment of  $120,000 for the year.  Then the tax payers are trying to say, its a lump sum and then taxable under the schedule/ formula method, which results in less tax being payable.
 
Unfortunately, NO.  This is still a pension and not a lump sum.  So is fully taxable!

CASE STUDY FOUR:

Joe has 200,000 pounds in an offshore bank account.  There is no way NZ IRD will find out about that.  Right?
 
With relatively new information sharing between countries, it is likely that IRD will find out!  It is likely that the overseas bank will ask for a Taxpayer Identification Number (TIN), and therefore the information will be passed onto NZ IRD.
 
NZ IRD will look for:

  • Should the initial capital have been taxed?  For example, could be taxable distribution from a Non Complying Trust.
  • Should there be ongoing income that should be taxed in NZ?

CASE STUDY FIVE:

Joe has a Trust that he established in the UK while he lived there.  Is there anything that needs to be urgently done?
 
Yes - Joe has 12 months to elect for this Trust to become a complying Trust.  Otherwise it becomes a Non Complying Trust, which has a 45% tax rate on capital gains and past year income! 
 
NZ has a settlor based tax regime, so the Tax is generally based on where the Settlor is.


CASE STUDY SIX:

Joe has lived in NZ for 10 years, and it is now 2022.
 
His parents still live in the UK, and they both passed away.  Surely the overseas inheritance is tax free?
 
 There are tax implications to consider: 

  1. Joe’s parents' Estate will be considered and taxed as a Trust in NZ.  So need to consider tax obligations of Trust in NZ.  For example, has Joe become a settlor of this Trust, and therefore Case Study 5 applies?
  2. In some countries, there is no Probate and Joe would receive the assets, and therefore the income, straight away upon the death of his parents.

CASE STUDY SEVEN:

Joe has an Australian rental property.  In the 2014 year, it makes a loss of $12,000.  What could Joe do?

  • Could opt out of 4 year transitional period, so that the loss could be included in NZ tax return.  Obviously would have to carefully consider other overseas income and assets.
  • Be careful who the money is loaned from, as may have to deduct Non Resident Withholding Tax (NRWT).  Or it could be worth applying to pay Approved Issuer Levy (AIL) instead.
  • As there is capital gains tax in Australia, it is worthwhile (and a requirement) filing annual tax returns in Australia, so that the losses carry forward.  This could offset some of the capital gain when the rental is eventually sold.
  • The $12,000 loss would need to be converted to NZ dollars.  Also, some of the expenses claimed in Australia might not be deductible in New Zealand, and commonly the depreciation needs to be reviewed and updated for NZ tax laws.
  • There could be an exchange gain or loss that is taxable!  See my previous blog.


Overall I hope this blog highlights that there are a lot of tax implications related to having assets overseas, and people who move to New Zealand need to carefully consider all of these implications!

Kind regards
Ross Barnett

Is this a great way to save Tax on Overseas Pensions?

18 July 2017

 

Is this a great way to save tax on overseas pensions?

If you are currently receiving a monthly pension from overseas, the pension is fully taxable in New Zealand (presuming you are a NZ tax resident).

Say it is $10,000 that you receive each month.

Some tax payers have changed their monthly payments to an annual payment.  So, using the above example, that would mean a total of $120,000 received for the year.  The tax payers are trying to say it's a lump sum and thus taxable under the Schedule/Formula method, which would result in less tax being payable.

Unfortunately, NO.  This is still a pension and not a lump sum.  So it is fully taxable!

Kind regards

Ross Barnett

Looking to Buy a Rental? Or convert your current personal house to a rental?

14 July 2017

Are You Looking To Buy A Rental?

What do you want from rental properties?  My idea of the perfect scenario is a debt free personal house and passive income coming in from rental properties. 
 
It appears we are around the peak of the market and for most investors, it is important to focus on cash flow or long term opportunity.
 
If you buy a standard house, at standard values through a real estate agent, it is likely to cost $5,000 or more each year, after receiving tax refunds.  If Labour get in and take away the tax benefits, this cost would increase to $9,000 or $170 per week.   Is it worth gambling on a capital gain of more than $9,000 a year over the next 1-5 years?

The only times I would buy a rental that is giving a large cash loss is:

  • If there was a 'twist' available that would change the cash flow substantially.  The best example of this is a subdividable property.  To start with, the cash flow might be negative $5,000 per year or more.  But if you subdivide and sell a section (ensure you get tax advice!), this could substantially reduce the mortgage, even after paying tax.  Or, subdivide and add another rental on the back to give more rental income.
  • If you are expecting a large inheritance or cash windfall which means you can pay off any personal house debt, and also reduce the rental debt so that it is then break even or better.
  • If you have large income and can quickly pay off any personal house debt and then quickly reduce the rental debt.
  • If it is a trading property and you are buying at a signifcant discount.  NOTE:  trading is risky and you would want to ensure there is still a good profit even if things go wrong.

Otherwise, my approach is slow and steady.

  • Can you improve rent on existing rentals?  A simple renovation can often improve the rent by $40 or more per week and give a large return on investment.
  • Can you subdivide or add minor dwellings to existing rentals?
  • Only buy rentals if either:
    • The rent covers all expenses and can pay down principal over 25 years, or
    • It is subdividable and ideally with the option of building a Duplex.  You still need to buy well and do your numbers carefully!
  • Watch and wait,  and hope the market crashes a little and that there is great buying in two to three years.

So overall, when buying a rental, I'm looking at how does this rental help me achieve my personal aims and goals.  If I buy, I want a strategy of how this rental will give me passive income.  That generally means buying extremely well, subdividing or reducing a large amount of debt.  Otherwise you are left hoping or gambling on capital gain!

 

Convert Your Current Personal House to a Rental?

When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental.  Unfortunately, this is often done for emotional reasons!

If you are thinking about doing this:

1)  Is your existing house a good rental?
Is there high tenant demand in the area?  Look at population figures for the area and talk to a local property manager.
Will you be able to attract a good tenant?
Is the property easy care and low maintenance?
Is there an opportunity to add value in the future?  For example, subdivide or add a minor dwelling.

2)  What is the cash flow?
As a starting point, I would work out the Gross Yield.  This is 50 weeks rent divided by the property value *100.  For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield.

The Gross Yield gives an indication of the cash flow:
5% or under is going to be quite negative cash flow based on 100% mortgage.
7% or better should break even or be positive cash flow.
Between 5% and 7% is still likely to be negative cash flow, but a smaller, more manageable amount.

Review the income less the full expenses.  The example below shows a $8,784 loss expected each year before tax.  After tax refunds, this drops to $4,914 per year or $94.50 per week.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3)  What happens if interest rates go up?
At 6.5% interest, the loss after tax refunds increases to $9,950 per year or $191 per week.

4)  Can you afford the cash flow losses?

5)  Do you want to gamble that the property will go up more than the cash loss?

6)  Or do you have a plan to change the cash flow?

  • Minor dwelling to increase rent
  • Subdivide long term and sell section, or build second rental on section
  • Inheritance coming that can reduce the rental debt.  NOTE:  you are likely to pay off any personal debt first.


Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

I hope you have found these two topics interesting!

Kind regards
Ross Barnett 

Hamilton Population Growth vs Building Consents Updated

13 July 2017

 

Hamilton population growth vs building consents updated

I just came across the 30/6/16 population estimate for Hamilton, Waikato and Waipa. 

 

Hamilton

The report from Stats NZ shows 4,400 population growth in Hamilton for the year ended 30/6/16.

Stats NZ shows the number of building consents in Hamilton for the same period as 1,213.

If there are 2.65 people per house (previous average), then the number of new builds should house 3,214 people.

So this means for the year ended 30/6/16, the new houses consented would be short by 448 houses (1186 / 2.65).

The year ended 30/6/15 was population growth of 3,300 vs 909 houses.  Or short by 336 houses.

The number of building consents for the year ending 30/6/17 is likely to be higher than for 30/6/16 as up to May, the consent were already 1,138.

The population growth estimates are much higher than the previous projections!

 

Waikato

The report from Stats NZ shows 1,700 population growth in Waikato district for the year ended 30/6/16.

Stats NZ shows the number of building consents in Waikato District for the same period as 780.

If there are 2.65 people per house (previous average), then the number of new builds should house 2,067 people.

So this means for the year ended 30/6/16, the new houses consented would be 138 houses (367 / 2.65) more than required.

The year ended 30/6/15 was population growth of 1,100 vs 491 houses.  Over supply of 76 houses.

 

Waipa

The report from Stats NZ shows 1,200 population growth in Waipa district for the year ended 30/6/16.

Stats NZ shows the number of building consents in Waipa District for the same period as 546.

If there are 2.65 people per house (previous average), then the number of new builds should house 1,447 people.

So this means for the year ended 30/6/16, the new houses consented would be 93 houses (247 / 2.65) more than required.

The year ended 30/6/15 was population growth of 1,000 vs 382 houses.  Over supply of 5 houses.

 

Kind regards

Ross Barnett

New Meth Levels

3 July 2017

NEW METH LEVELS

Standards New Zealand has just released the NZ standard on Testing Meth.  The new level is 1.5 micrograms per 100cm2 compared to the old level of 0.5 micrograms.  Click here to view the new standards. 

As many of you know, I own a small Meth Testing company (www.GetaMethTest.co.nz) that operates in Hamilton.  Over the 12 month period to 31/5/17, we have had 94.54% of rental properties tested show no meth on screening tests.  So only 5.46% of rentals tested required the full test to show the exact Meth levels in each room!   This was based on the old guidelines, so the new standards are likely to see even less full tests required!

So this gives some really key information:

  • You shouldn’t be afraid to get your rental tested for Meth.  From our experience with hundreds of screening tests, over 94% of rental properties are fine and will come back clean.
  • Watch how your property is tested.  If the light switches are tested for example, these are quite likely to show Meth present!  But I do not believe light switches are a true indication of the whole rental property. They are similar to money. Because they are frequently touched, they are more likely to show traces of Meth.
  • Spending more on the initial screening test, so that the samples don’t need to be obtained again later, is wasting time and money in over 94% of cases

I hope you found this useful!

Ross Barnett

Why I Don't Like Standard Companies

26 June 2017

WHY I DON'T LIKE STANDARD COMPANIES.

When trying to set up the right structure, there are a few things that are looked at:

  • Asset protection and your level of risk
  • Flexibility - what is going to change over time
  • Tax minimisation - how do we save you the maximum amount of tax
  • Long term goals and strategy
  • MOST IMPORTANT - Can we keep it simple?

Unfortunately, a lot of advisors miss another key component:  What happens if you need or want to sell?

Issues with Standard Companies - Example

Tom and Jane have a personal house worth $1 million and debt of $500k.

They have a standard company that has:

  • Block of flats worth $1.5 million and debt of $1 million (purchase price $1 million)
  • New townhouse worth $550k and debt $450k
  • New 4 bedroom house worth $750k and debt $650k (recently purchased 2016 for $650k)
  • Tom and Jane have $50k shareholders current account.

Tom and Jane decide to sell the block of flats, and net of cost receive the $1.5 million.  They pay off the $1 million debt and are left with $500,000 cash!

So what should Tom and Jane do?

They want to pay off their personal house and have it debt free.  This would be pretty normal and normally a good financial move.  So, without talking to their advisor, Tom and Jane take the money out of the company and pay off their personal house.

One year later they are getting their Financial Statements done:  Do you think there will be an issue?

Yes - there is a MAJOR issue.


Tom and Jane have taken $500,000 that they are not entitled to.  An easy argument is that $50,000 is repayment of the shareholders current account (would have been nice to have a Minute), so this leaves Tom and Jane with a $450,000 overdrawn current account.

The company has to charge interest on the overdrawn shareholders current account, say six months at 5.77% (presribed by IRD) being $13,000 approximately.  The company would then have to return this $13,000 as additional income in the year and pay $3,640 in additional tax at 28%.

Some people will be thinking that's easy, there is a $500k capital gain on the sale of the block of flats.  While the capital gain is correct, a standard company has no easy way to distribute these gains to the shareholders.  It can distribute capital gains tax free upon liquidation, but that would mean having to liquidate the company.  Liquidation would be expensive and messy as the other rentals would have to be sold, which would then mean the new 4 bedroom house would be caught by the 2 year Bright-line, and there would possibly be depreciation recovery or other costs.

There are ways to fix this issue in some circumstances, but that will incur additional costs to obtain expert advice and to make the changes.  Also, some of the fixes take time, and Tom and Jane could easily pay $30,000 or more in unnecessary tax!


I hope you have found this informative.  If you do have a standard company (not an LTC or QC) that owns rental properties, it would be worth having a free 5-10 minute chat with me, followed most likely by a one hour Initial Meeting ($329 inclusive GST) to sort out your issue and give you the best advice going forward.



Kind regards
Ross Barnett 

Nominations - Update to my News Article of 28/10/16

16 June 2016

Nominations – Update to my News Article of 28/10/16Stupid Tax Law – Be very careful with Nominations!

IRD have retracted their original approach and have confirmed no sale or disposal on a nomination.

Good news!!

Kind regards

Ross Barnett

No FBT on Work Utes?? Plus vehicle options, tips & tricks

14 June 2017

 

No FBT on work Utes?  (Applies more to trades people and businesses)

In the past, IRD generally allowed 'work related vehicles' to be fully deductible, with no FBT payable.  Having the vehicle signwritten helped as well.

IRD put out PUB00249 Exposure Draft earlier this year, which stated a 'work related vehicle' must:

  • Be signwritten, prominently and permanently
  • Not be a car
  • Not be available for employees' private use, except:
    • Travel to and from home that is necessary and a condition of their employment; or
    • Other travel that arises incidentally to the business use.

They also have a good example of 'also available for private use' on page 25.

CHANGE:  If you have a true work related vehicle, such as a ute, but it is available for private use, then FBT should still be due and payable.

The key part is it only needs to be available for private use!  It doesn't actually have to be used.

SUGGESTION:  Review if your vehicle or employees' vehicles are available for private use.  If so, look at paying full FBT, or another option is to pay FBT for the weekends.  As this is a relatively new exposure draft from IRD, we can expect IRD to focus on this a bit more over the next few years.

 

Vehicle Options

1)   FBT

If a normal company owns a vehicle that is available for private use, FBT should be payable.  This cannot be used for LTC's!

Advantage:  FBT is based on cost of vehicle.  So, for a cheap vehicle that is mainly private use, you can pay a small amount of FBT, but then legitimately be able to claim 100% of GST, fuel, oil, repairs, depreciation and any other vehicle costs.

Disadvantage:  If your vehicle is very expensive, FBT can be very expensive.  Also, if you already have very high business use, then FBT only gives a small benefit up to 100% business use.

Often we put FBT through as a journal entry with a GST adjustment.  This means that FBT is not paid separately, but your income tax is slightly higher.

If you operate a normal company, that is paying FBT, make sure you put all the vehicle expenses through the business, as they are fully claimable.

FBT rate - generally this is 49.25%.

Calculation and Example:  The benefit from a motor vehicle is deemed to be 20% of the GST inclusive value.  So, if you purchased a car in a normal company for $10,000 that is available for private use, the benefit is $2,000.  FBT at 49.25% is then $985 per year.  There is also a GST adjustment to this, and the cost of FBT is deductible as an expense for Income Tax.


2)  Public Service Mileage Rate or AA Rates

Commonly used for rental properties where a small amount of mileage is used.

Need to keep track of all kilometres and then claim the mileage rate.  Generally we use AA rates as they are higher.  Their rate for a  2.5L vehicle is  92 cents per kilometre.  The IRD Public Service Mileage rate is currently 73 cents for the 2017 income tax year.

Advantage:  Gives a high claim per kilometre.  Relatively simple and easy.

Disadvantage:  Generally can only claim maximum of 5,000 kilometres, and also need to log every trip!



3)  Claim a %

Commonly used by Trusts, Partnerships or Sole Traders.  A log book is completed for three months to establish the business use.  This % lasts for three years.

For a normal company, you can do this to a degree but can't have the vehicle owned by the company.  So you miss out on depreciation and the initial GST claim.  But still could get the % of operating costs.

The business % of the initial GST is claimed, the business % of fuel, oil, etc, is claimed for GST and income tax.  The business % is claimed off the depreciation.

Advantage:  Once three months log book is done, then no more log book for 2 years 9 months.

Disadvantage:  Not so great if business use is low, as can't use FBT.  Often have to do annual GST adjustments to correct GST claimed.

If the business owns the vehicle and it is used for business purposes, but doesn't have a log book, you can claim 25% as long as the actual percentage of use is reasonable.



Kind regards
Ross Barnett 

Labour's New Policy:Levelling the playing field for first home buyers

17 May 2017

Labour's New Policy "Levelling the playing field for first home buyers"

 

 

 

 

Labour's top priority is to "restore the dream of home ownership and ensuring housing for everyone."
http://www.labour.org.nz/levelling_the_playing_field_for_first_home_buyers

As property investors, we have to be very careful about how Labour's policies could impact on us.

The big questions is:  Will Labour get in?  The latest Colmar Brunton Poll has National at 46%, but National still requires some support from smaller parties to get a majority.  Labour is only at 30%.

If Labour do get in:

  • Wellington:  I would expect Wellington to boom as historically Labour goes spending.
     
  • "The biggest users of tax loopholes are large-scale speculators" - Labour's comments are a load of rubbish.  Large-scale speculators build a lot of houses for New Zealanders.  In the first year, often these projects will make a loss, which in the majority of cases would be carried forward to offset against the next year's profit.  This isn't abusing the rules.  It is standard business/accounting practice that the costs of business offset the revenue from business.  These large-scale speculators overall pay a lot of tax and GST to the Government!

It is possible to have a profit from a completed project and have this slightly offset by the early losses in the next project.  BUT, often these will be different entities that might not be able to offset, or the losses are likely to be quite small compared to the profits, and you can only offset for so long!  So, for example, Joe Bloggs Ltd develops five townhouses, sells them all and makes a $400,000 taxable profit in the year ending 31/3/17.  In the same year, Joe Bloggs Ltd buys empty land to do the next development.  The company buys new land for $500,000, incurring $25,000 of interest and $5,000 of rates as holding costs.  The new land for $500,000 isn't deductible and doesn't offset the $400,000 profit.  ONLY the holding costs are claimable.  So Joe Bloggs Ltd would pay tax on $400,000 less $25,000 less $5,000 = $370,000.  At 28%, tax would be $103,600.
 

  • "Losses from rental property investments will be ring-fenced."  There are quite a few parts to this:
    • How long would it take for Labour to make this happen?  Perhaps at the earliest, it could be for the year ending 31/3/19?  They will have to work through the tax law with IRD, consult, and then go through the process.  I very much doubt this would be by 31/3/18, especially with Christmas holidays.  So, if IRD really wanted to push this through, they could make it apply for the 31/3/19 year, but it is probably more likely to be for the 31/3/20 year.
    • Then phased in over five years.  So, if you had a rental making a loss of say $10,000:
      • 31/3/20 you would lose 20% of the loss, and at 33% have $660 less refund.
      • 31/3/21 you would lose 40% of the loss, and at 33% have $1,320 less refund
      • 31/3/22 you would lose 60% of the loss, and at 33% have $1,980 less refund
      • 31/3/23 you would lose 80% of the loss, and at 33% have $2,640 less refund
      • 31/3/24 you would lose 100% of the loss, and at 33% have $3,300 less refund.

SUGGESTION:  If you have a rental portfolio that is losing cash (not so worried if loss is just depreciation), then you should be having a five year plan to turn this loss into a profit or at least neutral.  Otherwise you really are just gambling on capital gains, which might or might not come.  There is no need to panic and sell in a rush!

    • Who will the ring-fencing hurt?  It will hurt the smaller investors who are making tax losses from rental investments and offsetting these against their personal income.  Most larger investors are making profits (especially if rental is their only income).   So will not be affected by ring-fencing.
    • Will ring-fencing make rents go up?  Property investors always threaten this, but my guess would be 'no'.  When building depreciation was taken away, rents didn't really go up as a result.  Rents are generally supply and demand driven - if there is a shortage of rentals, then rents go up.  So, indirectly ring-fencing may result in less property investors, therefore less rentals, which might result in rents going up.  Also, a lot of property investors are not negatively geared, so the changes won't affect them.
    • $150 million additional tax:  Ring-fencing of property losses long term is just a timing issue.  You can still claim the same losses, it just might take you a few more years to claim them.  That means for the first few years, Labour might get some additional tax.  However, as the properties start to turn positive or sell and sujbect to the Bright-line test, Labour will get less tax as the investors can use up their ring-fenced losses from earlier years.  In the ideal world, over say 20 years, Labour shouldn't get an extra cent in tax!

 

  • Labour plan to build 100,000 high quality, affordable homes over 10 years, with 50% in Auckland.
    • This would be 5,000 houses in Auckland each year.  From my  February 2017 blog, Auckland needs approximately 14,000 new houses a year but is only building 10,000.  So, if Labour could build the 5,000 extra., that would help the immediate problem and balance the books.  But what about the huge shortage that currently exists?  The 50,000 extra Auckland houses over 10 years wouldn't help with the current shortage, and in 10 years time, there is likely to still be a large shortage.  Therefore, even with the extra houses, I can't see Auckland house prices going down due to sheer demand.
    • In the last 12 months (April 2016 to March 2017), there were 30,000 new house consents.  If we take away Auckland, that would be 20,000.  If Labour is going to build 5,000 extra houses per year, that is a huge increase (20%).  This number of new houses could have a major impact on the demand by tenants (rents) and demand by buyers (house prices).
    • Outside of Auckland, this could be a real game changer!  Imagine 900 new houses in the Waikato in a year.  But it's not a one-off, it's every year for 10 years.  So 9,000 new houses.  At 2.65 people per house, that is 24,000 extra people that could be housed.  Between 2006 and 2013 Census (7 years), the Waikato population only grew by 22,815!
  • Ban foreign speculators from buying existing homes:  I'm not sure how they will differentiate between foreign speculators and foreign investors, but this is still likely to reduce the number of buyers, so could cause house prices to go down or not rise as much.
  • Bright-line test moved to five years:  I personally don't think this is a bad thing.  It just means you have to be very certain that it is a long term hold.  If the rental is sold within five years, you pay tax on the capital gain.  If you were an investor with multiple properties and you had to sell, then you would try to sell something you have had longer than five years.


The Labour Party policies are also likely to change over the next few months, and might be quite different if they are actually implemented!

Kind regards
Ross Barnett 

 

Little Loan Problem

5 May 2017

 LITTLE LOAN PROBLEM



 

 

 

 

 

At the moment we seem to be seeing more and more investors with loans in the wrong entity.  For example, the Company owns an investment property, but the loan is in the personal name.
 
In a worst case scenario, this could lead to the interest not being deductible.  In most cases, it leads to more work being required and creates a greater chance of an error or this issue being missed. 
 
With the example above, the individuals have borrowed money.  If this money is used to gain income, then the interest is deductible.  So we would normally claim the interest in the personal name, and then charge the Company the same interest.  Ideally the Company would pay the individual interest, and then the individual would pay the bank.  The Company would then be allowed the interest deduction if this money was used to buy the investment property.
 
Sound complicated?  I suggest taking this opportunity to just double check whether your loans are in the right entity.  And, if necessary, to discuss them with me and your mortgage broker to get them right.
 
Another common example can be that the borrowing is in a Trust, but the investment property is in a Company.  From my last newsletter (Can You Better Protect Yourself? - 1 May 2017),  this can also create an asset protection issue!
 
I’m excited to be doing the T42 off road marathon tomorrow, and hope you have a less painful weekend planned.

Kind regards
Ross Barnett 

Can You Better Protect Yourself?

1 May 2017

Can You Better Protect Yourself?

Case Study 1

Jo and Jack have a personal house in Mayfair St worth $1.5 million, no debt, and in JJ Trust.
 
They decide to get into property trading and development, operating through a Company.  Their banker suggests it is easiest to borrow funds in the Trust name secured over Mayfair St, so the Company buys Kent St for $400,000, plus has a $300,000 overdraft facility, all secured over Mayfair St and the Debt in the Trust.

A). The development goes horribly wrong.  The property market has crashed and there are leaky complications with the property and development.  The Company now owes $600k on a partially renovated property, plus $100k to subcontractors.  The Company decides to sell the property in a rush, to minimise potential loss.  Unfortunately it is only worth $500k.  Plus GST is owing on the sale of $65k.
 
I'm not a solvency or liquidation expert, but most likely the $65k GST debt would have first priority, so IRD would get paid first. Only $435k left now.  Then there are two unsecured creditors, the $600k the Trust has loaned, plus the $100k creditors.  But only $435k to pay $700k.  Most likely a liquidation would be forced, then liquidator fees would be taken that can easily amount to $50k.  The remaining $385k would most likely be paid out, with each unsecured creditor getting 55 cents in the dollar back.
 
So overall the Trust would get $330,000 of its $600,000 back, thus still owing the bank $270,000!
 

B). What if the Company takes out the loan, but it is secured solely over the personal, Mayfair St property?   This would most likely give the same outcome as A)
 

So what could be done to improve this?

  • If the bank took security of the trading property at Kent St.  From the sale, the bank would then get the $500,000 (presuming not mortgagee sale).  This means the Trust would only owe $100,000 to the bank, which is a $170,000 improvement on A)!
  • If the Trust had done a formal loan agreement and General Security Agreement (GSA) before the money was advanced to the Company, then the Trust would most likely have priority and get its loan back before GST or any other unsecured creditors. Again, this would mean the Trust would only owe $100,000 to the bank.

It is ESSENTIAL that you get legal advice before loaning between entities, and that you protect for the worst case.  Unfortunately, business and property development does go bad, so it is worth spending $500 to $1,000 to set it up correctly.  It is also ESSENTIAL that this is done before any money changes hands!  Sometimes the structures that banks suggest, and is easier from a finance perspective, are not in your best long term interests.


Case Study 2

Mike and Kelly have done well in life.  They have a personal home worth $1 million with $50,000 debt.  They have a rental portfolio in a company with $750,000 equity.
 
Their lawyer has recently suggested a family Trust be set up to protect their family home.  The Trust has been set up and the family home transferred into the Trust.
 
So everything is now safe and protected in the Trust?  Right?  
 
This is just a step in the process and you need to look further:

  • Should Mike and Kelly gift any amounts the Trust owe them?  In the past you could gift $27,000 per year each without paying Gift Duty.  Gift Duty has been abolished a number of years ago, so now you can gift the full amount in one go.  But, this can affect future rest home subsidies!  To have asset protection, the full amount really needs to be gifted.  If you choose not to gift the whole amount, lawyers can add some clever clauses into your loan documents to help give some protection.
     
  • Should the shares in the rental property be transferred to the Trust, and then this value gifted too?  This would provide further asset protection, but ensure you receive tax advice around any transfer of shares, as this can be complicated and there are many tax catches.
     
  • If Mike and Kelly have a current account with the Company (very likely), this could be assigned to the Trust, and then gifted.
     
  • If Mike and Kelly have life insurance policies, should these be owned by the Trust, so that any proceeds go directly to the Trust?

It is important to consider all major current and future assets.  Are there any other major assets that are worth protecting?


Case Study 3

Lisa and Jordan have a business operated through a company and a rental property business operated through a different company.  The business makes good profit.  The Rental Company breaks even, but they aim to pay down loans over the next two years.
 
Money is transferred from the Business Company to the Rental Company to pay down the loans - What is the major issue here?
 
Well, if the business goes bust, then the Rental Company would have to repay the advances. This can amount to hundreds of thousands over a long period.
 
How can it be improved?  
 
Generally it is better for the profits and therefore money, to flow down to the owner and then be advanced to the Rental Company.  These advances could be from a Trust long term, with formal loan agreements and General Security Agreements in place.  It is also important to make sure the profits have flown currently to the owner and this may require the need for dividends to move retained profits to the owner legitimately. 
 





 

 

 

 



Kind regards
Ross Barnett 

Simple Things to Remember for Year End 31 March 2017

 

 

 

 

 

 

 

 

Dear Client

With another 31st March rolling around, I thought it was a great time to remind you of the year end items you should be thinking about.
 
 
Rental and Business
Saturday is a great time to print bank and loan information from internet banking, so that you have proof of the 31/3/17 balances to give us with your accounting information.

Keep any documents, such as annual loan summaries or property manager statements.


Rental
Have you purchased a new rental in the 2017 year (1/4/16 to 31/3/17)?  If so, is it worth getting a chattels valuation done and you can check out www.valuit.co.nz, or give me a quick email or phone call.  If the property was purchased with newish chattels like carpet, dishwasher, heat pumps, curtains and stove, then most likely it will be worthwhile.  Whereas, if the property has low value or no chattels, then it won’t be worth it.  If you have done a major renovation and replaced all of the chattels, then we can use the cost price of each item and a valuation isn’t needed.
 

Business

  • More for Business but can apply to some rentals – Do you have bad debts?  This is customers who owe you money and there is no chance of recovering the debt.  If so, these should be written off as at 31/3/17.
  • Do you have stock and have you done a stocktake?  This is done at cost and excluding GST.
  • Do you have work in progress?  If so, it is great to bill as much of this as possible in March, and then we require a list of your unbilled work in progress at 31/3/17.  This is done at cost and excluding GST.
     
  • Debtors and Creditors:  Hopefully you have Xero or another system of tracking which customers owe you and what suppliers you owe.  But if you don’t, you need to keep a record of these as at 31/3/17.
  • Do you have cash on hand?  If so, we need the amount as at 31/3/17 to be included with your other financial information.


Our Annual Questionaires will change on our website from 2016 to 2017 on 1 April 2017.  You can access these here.
 
But remember, we would prefer you to wait until you have all the information before sending these into us.
 
 
Kind regards
Ross Barnett

Interest Only? Or Principal and Interest?

21 March 2017

INTEREST ONLY?  OR PRINCIPAL AND INTEREST?


This is a question that gets asked again and again in property circles, with a few different opinions.

In my opinion, the reason to own rental properties long term is to receive passive income.  Unfortunately, a lot of rentals run at a cash loss due to high interest costs.  But if the loan is slowly repaid and the interest costs slowly decreased, the rental can change to being positive cash flow and providing passive income.  This is a very safe method of becoming cash flow positive as you are not reliant on rent increases or lower interest rates.

So the main reason I go Principal and Interest (P&I) is to long term hold a debt free rental property providing passive income.

 

 

But ....... the "tax benefits"

A lot of experts and investors will argue "it's better to be on interest only, and to repay your personal home first, where there are no tax benefits".  In a very simple sense, this is true.  But:

  1. Is a tax refund really that great?  For high income property investors, you are paying $3 to the bank to get $1 back in tax benefit.  So really you are losing $2!  Wouldn't it be better to not pay the $3!
  2. How much tax are you really saving?  Based on a $500,000 rental, 36 year term and 5% interest rate, I compared P&I with Interest Only over the first five years.  In simple terms, you would be paying $2,684 per month on P&I versus $2,083 on Interest Only.  An extra $601 per month.  Over five years you have repaid $36,000 approximately, plus saved $4,400 in interest (as you are paying interest on a lower loan).  At 33% tax rate, this would have saved $1,462 in tax or $292 per year approximately over the five years.  Is it really worth it?
  3. What would happen to the money if you weren't P&I?  Most people find that money comes in, and the same money goes out.  If you increase the amount coming in, it still disappears.  If you increase the amount going out, you manage your money a little better and still survive.  So, paying Principal forces you to be a bit smarter with your money, and if you weren't doing Principal repayments, you would probably find this money just disappears on something else.

The second reason I like P&I is because it builds a buffer without relying on capital gains.  If you buy a rental for $500,000, pay P&I for five years, then you should only owe $460,000 approximately.  So, if in a worst case scenario you were forced to sell, after commission and other costs, hopefully you could repay the $460,000 loan.  Whereas, in a flat market, with interest only, the net sale proceeds might be less than the loan!

Where Interest Only can be appropriate

If you don’t have the cashflow to pay P&I , then you really have no option.  You are effectively gambling that long term the property will go up in value and be more than your loan.
 
I hope you found this useful and that it has given you something further to consider.

Kind regards
Ross Barnett 

Bright-Line - Tricky Issues and Update

6 March 2017

BRIGHT-LINE - TRICKY ISSUES AND UPDATE

 

 

 

 

 

 

 

 

Here are some important points around the Bright-Line Test that you need to be aware of:


Measuring the Bright-line Time Period:

  • Effective from 1 October 2015.  So, if Sale and Purchase Agreement dated before that, then Bright-Line doesn't apply.
  • Date of Acquisition = Normally Settlement.
  • Date of Disposal = Sale & Purchase Agreement date.

Must be residential land: There is some criteria around this:

  • Includes overseas residential land!  But should also get foreign tax credit if gain taxed overseas already.
  • Includes B&B's and AirBNB properties.

Off The Plan Sales:

  • Purchase = date of Sale & Purchase Ageement.
  • Sale =  date of Sale & Purchase Agreement.

Subdivided Land:

  • Date of Acquisition = registration of undivided land, i.e. when the whole property is purchased.
  • Date of Disposal = Sale & Purchase Agreement for sale of section.
  • NOTE:  Likely to be taxable under other tax provisions.

Leasehold to Freehold:

  • Date of Acquisition = date lease granted Gift.
  • Date of Disposal = date of registration

Compulsory Acquisition:

  • Date of Disposal = date of compulsory acquisition

Mortgagee Sale:

  • Date of Disposal = date of disposal by mortgagee.

Nominations: 

  • Nomination is disposal of land for Bright-Line rules
  • No association person relief
  • THIS IS A RISKY AREA!  For more information, click here to view my newsletter of 28/10/16.

Main Home Exclusion:

  • Can be Trust
  • Must be predominately main home, so more than 50% of time used as main home.  If vacant and renovated for more time than used as a personal house, then not main home.
  • Main Home Exclusion can only be used twice in 2 year period.
  • Doesn't apply if there is a pattern of buying and selling personal home.
  • Holiday ok if short term.  Longer time, depends on exact circumstances and as long as you don't set up another home, it should be ok.
  • Subdivide main house.  Generally section sale would also have main home exclusion but would suggest getting full advice on this to double check.


Main home looking at buying and selling for a profit:

  • If intention is to renovate and sell for profit, then taxable under other income tax sections.
  • Main home exclusion would not apply.
  • So be very careful with what your intention is and how this is documented!

Main Home intended to renovate and sell:

Gain is taxable.

Main Home, intended to live in and renovate.  But then later decide to sell:

Gain not taxable and exclusion for main home should apply (as long as no pattern of buying and selling, and still meet home exclusion provisions).


Relationship Property Transfers:

  • Generally excluded and transfers deemed to be at cost.

Inherited Property:

  • Generally excluded.

Change of Trustee:

  • If only a change of Trustee, then stays with original registration date.

Residential Land Withholding Tax (RLWT):

  • Applies from 1 July 2016.
  • Only for Offshore RLWT person who disposes of land subject to Bright-line rule.
  • Only relates to New Zealand land.
  • Obligation on conveyancer at settlement and to account to IRD.
  • If taxed under other tax provisions, but within 2 years, there will still be RLWT if vendor is an "Offshore RLWT" person.
  • There are three RLWT methods.


I hope this summary of the main points is helpful.

Kind regards
Ross Barnett 

2017 Annual Questionnaire Availability

3 March 2017

A reminder that the end of the financial year is fast approaching.  Our 2017 Annual Checklist Questionnaires will be available on our website (www.cswaikato.co.nz) from 1 April 2017. 
 
Email instructions and links to access the 2017 Questionnaires online will be sent to you during the week beginning 13 March.
 
The email is to give you the instructions and links only.  The 2017 Questionnaires will not be available to be completed until after 1.4.17.
 
If you have not received an email by 20 March, please contact us on (07) 839 2801.
 
Important note for businesses:  Don’t forget to do your stock take as at 31/3/17.


Hamilton Property Boom

24 February 2017

 

HAMILTON PROPERTY BOOM

 

The Hamilton property values have jumped over the last two years, as shown in the graph below. 

Hamilton median sale price at January 2017 is slightly above the NZ median for the first time since 1998.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prediction:  No one has a crystal ball, so my prediction is just a guess, the same as yours.  My prediction based on historic trends is the yellow line, and that Hamilton median sale price will stay pretty flat for the next 7 years.  This is similar to the last flat period from 2007 to 2014.  Obviously the prices could drop or go up, and this is just my prediction.
 
Apart from Auckland, I see the rest of New Zealand to be in a similar position to Hamilton and near the peak of the market.  Maybe some of the smaller towns delayed slightly.   From recent real estate firm's auction results, it is noticeable that a lot of houses are not selling at auction.
 
Keys from past cycles:

  • Don’t sell in a flat period, as you are likely to lose out.
  • If you buy now, make sure the figures work for you and so that you can hold it for at least 7-8 years to get through the possible flat cycle.  This is where a lot of property investors go wrong.  They jump into the property game too late and without a plan, then get sick of monthly cash losses and sick of tenants, then sell 2-3 years later for a $50,000 loss.

 There are still property opportunities out there, but I think you need to add value by buying extremely well, or subdividing, or smart renovations, so that you have some initial equity and positive cashflow.

Kind regards
Ross Barnett

Population Growth vs Number of Houses Being Built

20 February 2017

Population Growth vs Number of Houses Being Built


 

 

 

 

 

In our January 2016 Blog, we looked at these stats.  I have now updated them for the last year.

Hamilton

  • From the 2006 to 2013 census, the population grew 12,024 to 141,612.  This is an increase of approximately 1,700 per year.
  • HCC 10 year plan 2015 to 2025 "projected to grow from 153,000 in 2016 to 174,000 in 2025", or 2,100 to 2,300 approximately per year.
  • Statistics NZ show 1,179 new dwellings from January 2016 to December 2016.
  • From our January 2016 Blog, average 2.65 people per house.
  • New dwellings can house 3,124 new people in the year.

From this information, Hamilton is building more houses than it requires by around 350 houses or to accommodate 924 people.  This could be catching up a shortage.  I would, therefore, be cautious buying in Hamilton and make sure the figures really work.  It will be interesting to watch rental statistics over the next year to see if there are excess rentals!

Need 830 new houses per year  Vs  Building 1,179

Waikato

  • From the 2006 to 2013 Census, the population grew 22,815 to 403,638.  This is an increase of approximately 3,300 per year.
  • Statistics NZ showed 2.3% growth to June 2016 or 10,000 approximately per year.
  • Statistics NZ show 3,552 new dwellings from January 2016 to December 2016.  November 2014 to October 2015 was 2,756, so 796 more than around a year before.
  • From our January 2016 Blog, average 2.65 people per house.
  • New dwellings can house 11,903 new people in the year.

From this information, Waikato is building pretty much the perfect number of houses.

Need 3,585 new houses per year  Vs  Building 3,552

 

Tauranga

  • From the 2006 to 2013 Census, the population grew 10,905 to 114,789.  This is an icnrease of approximately 1,600 per year.
  • Tauranga City 10 year plan 2015 to 2025, 579 growth 2018-2023, or 1,900 approximately per year.
  • Statistics NZ show 1,695 new dwellings from January 2016 to December 2016.
  • From our January 2016 Blog, average 2.6 people per house.
  • New dwellings can house 4,407 new people in the year.

From this information, Tauranga is building more houses than it requires by around 950 houses.  I would, therefore, be very cautious buying in Tauranga and make sure the figures really work.  It will be interesting to watch rental statistics over the next year to see if there are excess rentals!

Need 732 new houses per year  Vs  Building 1,695

BOP new dwellings, 2,520 from January 2016 to December 2016.  November 2014 to October 2015 was 1,734, so 786 more than around a year before.

Auckland

  • From the 2006 to 2013 census, the population grew 110,589 to 1,415,550.  This is an increase of approximately 16,000 per year.
  • Statistics NZ showed 2.8% growth to June 2016 or 41,860 approximately per year.
  • Statistics NZ show 9,930 new dwellings from January 2016 to December 2016.  November 2014 to October 2015 was 8,935, so 995 more than around a year before.
  • From our January 2016 Blog, average 3 people per house.
  • New dwellings can house 29,790 new people in the year.

From this information, Auckland is not building enough houses to keep up with demand, and is approximately 4,000 houses short in one year!  This is similar to the stats a year ago, and Auckland seems to be getting further and further behind.

Need 13,953 new houses per year  Vs  Building 9,930


When you look at this information overall, it is concerning that Hamilton, Waikato, and Tauranga seem to be building considerably more houses than required.  This could create a large over supply and a possible 'bust'.

It appears that a lot of the lift in property prices in Hamilton, Waikato, and Tauranga is due to greed and the ripple effect, rather than being based on the true fundamentals of supply and demand.

Auckland, on the other hand, has a well-documented shortage, and over the last year the housing shortage has gotten worse by 4,000 houses.  If immigration stays high and the Auckland population continues to grow, then I still cannot see Auckland house prices crashing.  While there might be a flat period or blip, economics suggest that Auckland house prices will continue to rise.

Kind regards
Ross Barnett 

Great News for Landlords!

10 February 2017

 

GREAT NEWS FOR LANDLORDS!

This is a news article published on 9/02/17 in the Manawatu Standard:


FOXTON LANDLORD APPEALS NEW TENANCY RULES AND WINS  by Catherine Harris

The Foxton house was so badly soiled that the carpets had to be replaced.



A manawatu landlord has won what could be a precedent-setting case against his tenant who was let off a big bill for damaging his property.

David Russ of Tekoa Trust took his case to court after the Tenancy Tribunal ruled last year that his tenant, Amanda Stewart, was not liable for damage caused by her dogs urinating throughout the Foxton house she rented.

The tribunal based its decision on the landmark "Osaki" court case, in which tenants who accidentally set fire to their rental house did not have to pay for the damage.

Landlords around the country became concerned that if they had insurance, the tenant would not have to pay even in cases of carelessness.

However, the Palmerston North District Court has overturned the tribunal's decision and ordered Stewart to pay about $3790 in carpet replacement costs, court costs and lost rent.

Judge David Smith said he was "of the view" that the tribunal adjudicator was wrong for concluding the damage was unintentional.

Not only had the tenant breached a no-dog clause in her tenancy agreement, but she had continued to let them in after perhaps a couple of accidents.

Fairfax Media was unable to contact Stewart, who did not attend the case.

Russ said he was "pretty happy with the outcome.  Common sense has prevailed."  He said there was a big difference between damage based on a pot fire and damage which was allowed to happen.  "People have to be responsible for their actions."

Tenancy expert Scotney Williams of tenancy.co.nz said the appeal case would help both landlords and tenants by clarifying the meaning of unintentional damage.  "The decision being a district court decision creates binding precedent at the Tenancy Tribunal for similar cases", he said.  He said the District Court used a passage from the Brookers Summary Offence, a legal text book, to support its decision.

"Conduct will be intentional when it is deliberate, and not accidental, and [resulting damage] will be intentional if the defendant meant to cause it or {probably) knew it was going to result," the court order said regarding the reference.

Building and Construction Minister Nick Smith has proposed to change the current law so a tenant would be liable for damage of up to four weeks of rent or, if it was more, the landlord's insurance excess.

The law change is currently going through consultation.



Kind regards
Ross Barnett 

Recap of Commercial Property - major deductions missed!

Happy New Year everyone.  This is an old newsletter I wrote in 2015 which I thought I would use again, as it is very important if you own commercial property.

COMMERCIAL PROPERTY - major deductions missed!

I was shocked a few weeks ago with the level of advice given by another accounting firm recently to a commercial property investor.  Unfortunately most accountants don't specialise in property and miss some major deductions that can save thousands in tax for the investor.

In this example, a client had purchased a motel and the building alone was $1.9 million.  The accountant hadn't recommended a chattels valuation, and with no more building depreciation from 1/04/11, they had claimed $0 depreciation.  This is appalling!

  • One option is:  Under commercial rules you can actually still depreciate up to 15% of the buildings adjusted book value at 2% straight line depreciation. 
  • Or, a much better option, we became involved and recommended that Valuit complete a chattels valuation.  This has resulted in total chattels of $393,251, which will be depreciated long term.  For the first 11 months this resulted in $32,517 depreciation and saved $10,730.61 tax at 33%!  The cost was only $1,525.  The future depreciation will be $360,734 and over the next 10 years approximately, this will save a further $119,000 in tax.

While talking to the valuer, he mentioned a childcare centre he had recently valued and the depreciation was $50,000 for the first year!  If taxed at 33%, this would mean a $16,500 tax saving!

So please, if you have a commercial property or a residential rental with high value chattels, talk to me about chattels depreciation!  Or look at www.valuit.co.nz

Kind regards
Ross Barnett

Christmas Wishes and Trading Hours

We wish you a very Merry Christmas, and a safe and relaxing holiday break.

We are all looking forward to a well earned break over Christmas and New Year.  A reminder that our office will be closing for the Christmas period.

CHRISTMAS TRADING HOURS

Our Office is closing on Friday, 23 December 2016 at 12 noon.
We will reopen on Monday, 9 January 2017 at 8.00 am.



 



PROVISIONAL TAX AND GST

GST and the second provisional tax payment are due on 15 January 2017.  We will be sending out provisional tax notices before Christmas.   If you have any questions, please give Karen a call on (07) 839 2801 when our office re-opens on 9 January 2017.






 

 

 

 

 

 

 

Kind regards
Ross and the Team at Coombe Smith

You're Missing Out If You Haven't Had a Chattels Valuation Done!

2 December 2016

 

You're missing out if you haven't had a chattels valuation done!

Did you know that you can still depreciate carpet, curtains, stoves, heat pumps, dishwashers and other chattels?  From 1/04/11 there is no building depreciation, so depreciating chattels has become even more important.  For commercial property owners there are even more deductions available!
 

I've looked back at a few clients who had chattels valuations done by Valuit a few years ago:

  • Client 1:  Owned three properties for a number of years.  $79,001 total chattels depreciation claimed = approximately $26,000 tax saved.  Cost around $400 *3, so $1,200 total cost to save $26,000.  2167% return on investment.
  • Client 2: Owned one property for a number of years and recently sold.
    • $30,969 chattels depreciation claimed, saving $10,219.77 in tax.
    • Equivalent building depreciation would have been approximately $7,000, but this would have been recovered on sale, where as the chattels have actually reduced in value, so no recovery.
  • Client 3: Very simple commercial building fit out.  $52,102 chattels depreciation claimed = approximately $17,000 tax saved.

Over the last few years I've noticed a lot of property investors haven't had these done and have missed out on thousands in tax refunds.  For new purchases, you need to get a valuation done before the first tax return is filed and ideally at the start.  If you have already filed, it gets a bit trickier:

  • IRD don't like investors changing from just building to chattels split out but that doesn't mean they are right. 
  • If it has just been one year, maybe two, then it is possible to get a valuation that reflects the purchase values, then to calculate the opening book values and start depreciating.  You will have some 'black hole' depreciation but at least you get some going forward.
  • Over two years, you can swear and curse at your old advisers but that's about it.


Cost vs Benefit
 
Valuit charge $400 + disbursements +GST to complete a chattels valuation for a Single Tenancy Dwelling.

The benefit of the valuation depends a lot on the property you own.  If it is a brand new property, then there will be a large amount of chattels and it will make sense to get a valuation completed. 

But if the property is old, run down and only with a small number of low value chattels, then it probably won’t be worth getting a valuation done. 

In the middle is the grey area, where it really depends on the specific property.  If you are unsure, we suggest you either give me a ring, view Valuit’s website or talk to Valuit.

For example $10,000 of carpet:

  • If there is no chattels valuation (or separate cost), then it is included in building with no depreciation.
  • If there is a chattels valuation, then it is depreciable at 25% which is $2,500 per year.  In the first year this would give a $750 tax saving if the owner is on the 30% tax rate.  This would easily pay for itself in the first year!


Terry le Grove is the Waikato representative for Valuit.  He will let you know, at no cost to you, if it is not worthwhile doing a valuation.  So it is worth discussing this with him.  His contact details are:

Terry le Grove, Property Depreciation Specialist
Valuit
Freephone 0508 482 583
Mobile 027 296 0827
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website at www.valuit.co.nz


If you haven't depreciated your chattels,  email  This email address is being protected from spambots. You need JavaScript enabled to view it.  to see if there is something we can do for you.

  
Kind regards
Ross Barnett 

Update about Meth Contamination and the New Levels

25 November 2016

Here is a great update from NZ Property Investors Federation about Meth contamination and the new levels:

 

Andrew King updates members on meth contamination:

The much anticipated report on acceptable levels of meth contamination was released recently by the Ministry of Health.

The main finding of the report is that the current levels of acceptable meth contamination are to be amended. The new recommendations are that levels where meth has been manufactured will remain at 0.5 micrograms per 100cm2.

However where meth has just been used in a property, the level has been increased to 1.5 micrograms per 100cm2 if the property has carpet, or 2 micrograms per 100cm2 if the property doesn't have carpet.

This is good news for everyone. To put these levels into perspective, the current level of 0.5 micrograms per 100cm2 is the equivalent of a piece of meth the size of a grain of salt, divided by 1,000. It is microscopic and at a level that cannot effect even the most vulnerable.

Despite this, many thousands of dollars must be spent in order to get the level of meth in a property down to this level.

Meth cleaning companies have been chastised for the cost they charge. However it is extremely difficult for them to get a property below this level. In addition to the fact that many more properties will no longer being classified as contaminated, increasing the acceptable level where meth has been used should make the cleaner’s job easier.

There has been some confusion as to when these new recommendations should apply. Technically, each local authority needs to individually adopt these new recommendations, which could see different levels applying around the country.

However meth cleaning companies appear to be applying these new levels for new work they are taking on. They have encountered problems with customers who are half way through or just completed a cleanup under the previous recommendations. However the work was completed under the rules of the day and although it is understandable that these owners do not want to pay for a higher level of cleaning, it is unreasonable for these companies not to be paid for the work they have done.

The good news for these property owners is that rechecks after a property has been cleaned will likely be at the new recommended levels. This means that some will have a better chance of passing.

Standards NZ will be releasing its draft meth standard soon for public consultation.
http://www.nzpif.org.nz/news/view/58334


Kind regards
Ross Barnett 

Caution, Interest Rates and 13% Gross Yield

10 November 2016

 

CAUTION,  INTEREST RATES AND 13% GROSS YIELD

 

How do you buy a good property, in a good area, and get 13% Gross Yield?

Last night, the Waikato Property Investors meeting focused on 'maximising what you have'.  So, rather than buying a new rental with a poor return, you might be able to subdivide, build a minor dwelling, or build a duplex.  It was all about focusing on your current rentals and trying to maximise the return.


My favourite example, given by one of the speakers last night, is renovations.  The example was a renovation of a one bedroom unit for $20,000.  New kitchen, carpet, toilet, laundry tub, etc.  After the renovation the rent was increased by $50 per week, and the speaker thought it could really go up $60 per week.

So that is around $2,500 extra rent per year, or a 13% return or gross yield on the $20,000!  If you borrowed the $20,000 at current interest rates, it would cost around $900 per year, so would improve the rental's annual cash flow by approximately $1,600 per year.

The speaker also thought the $20,000 renovation would improve the value by $50,000!

So a simple renovation can give a great gross yield, improve cash flow, and create an equity gain.

 

Interest Rates

ASB recently increased their 3, 4 and 5 year rates.

BNZ just followed and increased their 3 year rate.

So while the OCR goes down, it seems the long term rates are going up.

No one has a crystal ball, and with all the uncertainty at the moment, I think we are all guessing.  One option is to spread your loans into some short term and some long term.  This means you win either way, rather than gambling on one outcome.

If you haven't already, I suggest you review your interest rate risk and strategy.

 

Caution

No one knows exactly what will happen with the property market.  Some people say it will crash.  Some say that it will go flat and yet others say that it will continue to boom. 

In my opinion, it is not a time to gamble and take a big risk.  If you are buying a new rental, I feel that you need there to be good cash flow or a large equity increase available through a twist.

With interest rates being so low, I feel that investors should be taking advantage of this and paying down debt.


Kind regards
Ross Barnett 

Stupid Tax Law - Be Very Careful With Nominations!

28 October 2016

STUPID TAX LAW - BE VERY CAREFUL WITH NOMINATIONS!

Consider this:  You buy a section off the plans for your personal home.  You put your personal name or nominee on the agreement as you need to discuss with your advisors which entity to put the section under.  You then nominate your Family Trust.  Surely there can't be any tax issues?  It's going to be your personal home too!

Well, there could be unexpected tax consequences.  If you are buying a residential property, and then nominating another entity, you need to consider the 2 year Bright-line test.

We are finding this situation is coming up quite often and we think the rules around this are a joke!

Bob signs a Sale and Purchase Agreement to buy a section for $200,000 in January 2016 to build his personal family home.

In October 2016, Bob has now established a Family Trust.  Bob nominates the Family Trust as the purchaser.  The market has jumped in value and the section is worth $300,000 at this time (October 2016).  Title is then available in January 2017, when Bob's Family Trust settles on the property.

  • IRD treat the nomination as a sale.  So for the 2 year Bright-line Test - purchased January 2016 and sold October 2016, which is within two years.
  • You might be thinking 'No worries, there is personal home exemption'.  WRONG.  This is just a section, so isn't Bob's personal home yet, so NO EXEMPTION.
  • Or, 'Surely there is something in the rules to allow for related party transfers like this'.  WRONG.  There is no allowance in the Bright-line Test for related party transfers (this is an area where you have to be particularly careful!).


SUGGESTIONS:

If you are looking at purchasing a property, ideally put the correct purchaser on the Sale and Purchase Agreement to start with.

If this isn't possible, then as soon as you are able to nominate the correct entity, get proof of the values (and keep this), and if there is no change in value, nominate the new party.

If there has been an increase in value, then you might have to wait until you can transfer the property into the correct entity without being taxed by the Bright-line Test (either after two years or once personal home test satisfied - it is worth checking this timing with an expert!).

See relevant excerpt below from IRD Tax Information Bulletin.

Kind regards
Ross Barnett


 

 



Simple Information for a Friday - 2 year Bright-line Rules

21 October 2016

Simple Information for a Friday - 2 year Bright-line Rules

 

If you are forced to sell a property, it is important to understand the five basic parts of the 2 year Bright-line rules.

1.  Only affects property purchased after 1/10/15:  Joe King signs a sale and purchase agreement to buy 241 Joke St on 15/9/15.  His intention is long term hold and he has no history of trading or association with trading.  Unfortunately, on 21/10/16 Joe is forced to sell the rental due to redundancy.

  • Even though the property has been owned for under two years, the Bright-line rules do not apply as the agreement was before 1/10/15.
  • As the property was intended as a long term hold property, other tax rules do not apply.

 

2.  Acquisition date for the Bright-line rules is the date the title is registered.

 

3.  Disposal date is the date of an agreement to dispose of the land:  Joe King signs the purchase agreement on 1/10/15 to buy a second rental, which settles on 30/10/15.  His intention is long term hold and he has no history of trading or association with trading.  Unfortunately, due to redundancy, he is forced to sell.  Two examples:

  1. Joe enters an agreement to sell on the 30/10/18, three years after purchase - Not taxable under Bright-line rules as over two years.
  2. Joe enters an agreement to sell on the 20/10/17, but settles on 20/11/17.  We look at the date title is registered (30/10/15) and date the agreement is signed 20/10/17, so this is within two years and therefore taxable under the Bright-line rules.

 

4.  Personal house exclusion.  Must be predominately used as main home, and can only use the personal home exclusion twice in two years.  So George King:

  • Buys first personal house that settles 1/11/15.  Sells 30/11/16.
  • Buys second personal house 15/11/16.  Sells 15/3/17.
  • Buys third personal house 20/2/17.

The sale of the first and second house would not be taxed by the Bright-line rules, as George gets the personal house exclusion.

If George entered into an agreement to sell the third personal house before 1/11/17, then any gain on this third personal house would be taxable.

IRD would also look at a pattern.  If George continued to buy and sell a large number of personal houses, even though he might not be taxable under the Bright-line test, IRD would look to tax under other tax rules.

 

5.  Normal tax rules apply:  If a rental property is purchased with the intention of selling for a profit, then the gains are taxable.  It doesn't matter if held for 1 month, 3 years or 30 years.  The gains will always be taxable.

 

Enjoy your weekend.

Kind regards
Ross Barnett 

 

 

Reducing Depreciation Recovery - Recap!

13 October 2016

 

Reducing Depreciation Recovery - Recap!

Quite a few property investors are thinking about selling, so I thought it was very timely to send through this article I wrote in 2013 on reducing depreciation recovery.   At the moment we have a few investors who are selling their properties to developers, and the developer are then demolishing or selling the existing building.  In this situation the building is worthless or worth a small sale value like $20,000.   So if you are selling to a developer, find out what they will be doing with the building, and then have a chat to me.  Most likely we would add a clause in the sale and purchase agreement to confirm the building value, and therefore stop any recovery!



Original Article published 23 November 2013:

Should you just accept that you will have to recover all the building depreciation you have previously claimed? ……… NO

In many cases, the building depreciation recovered is only a fraction of the total claimed and there are a number of ways to minimise it.


What is Depreciation Recovery?

In the past, property investors have been able to claim Building Depreciation.  An investor may have purchased an investment property for $350,000 of which $200,000 is land, $125,000 is building and $25,000 is chattels like carpets and curtains that have been valued by a Valuit Chattels valuation.  Most investors would have claimed 3% or 4% diminishing value depreciation on the $125,000 (or around $3,500 to $5,000) per year.  They also would have depreciated the chattels at their respective depreciation rates.  So over 5 years the investor may have claimed $20,000 of building depreciation, bringing the book value of the building down to $105,000.

In the past, the IRD has given a deduction for the reduction in value of the building.  If the building hasn’t been reducing in value, has increased in value, or has reduced at a lesser rate, then the property investor has been over-claiming building depreciation.  They have been claiming a deduction which is perfectly legal and allowable, but that isn’t really occurring in their circumstances.

When the building is sold, an investor who has been over-claiming this deduction, will then have to pay all or a part of it back again, which is depreciation recovery.

  • Depreciation Recovery generally only applies to buildings.
  • Chattels generally reduce in value at similar levels to IRD rates.  Therefore, when the investment property is sold, there is no recovery.  A chattels valuation could be obtained at date of sale to prove this.


Carrying on using the example given above, if the investment property is now sold 5 years later for $500,000.  The chattels might be worth $10,000, the building $190,000 and the land $300,000.  The building book value is only $105,000, so the $20,000 building depreciation claimed over the 5 years will be recovered and become taxable income.  From $125,000 to $190,000 is a $65,000 capital gain, which is currently non taxable in New Zealand.  In this example, the difference between the real building value $190,000 and the book value $105,000 is large, so there would be full depreciation recovery with no chance of reducing.  If the values are a lot closer, then there are a number of opportunities to reduce this.


How to reduce Building Depreciation Recovery?

1) Make sure your accountant or the person calculating the recovery knows what they are doing.  I have recently seen an example where an accountancy firm showed a recovery of $16,700 approximately when the recovered amount should have been $5,600 maximum.  This is a difference of $11,100 taxable income, or at the 33% tax rate $3,663 extra tax paid for no reason. This is a great reason to use a real ‘property accountant’, someone who specialises in and understands property.

2) A starting point to establishing the building value is normally the rates valuation.  From the rates information, work out what percentage is building and then apply this to the sale figure (less deductions!).  If this figure is over your building book value, then there will be building depreciation recovery (presuming you have claimed building depreciation in the past).

3) If the rates figure and the book value are similar, you could look at writing a clause in the contract.  The parties agree the building value is $XXXXX.

a.  Example – The building cost $125,000 and closing book value is now $105,000 so $20,000 building depreciation claimed.  The sale value is $300,000 and based on the rates valuation the building should be worth $112,500.  The parties could write a clause in the contract, “The parties agree that the building value is $105,000”.  As long as the two parties are not related, then this is the sale price.

b. You should not be too aggressive with this approach and the building value needs to be reasonable.


4) Any legal fees for the sale will be claimable under the new legal fees deduction rules.

5) Any commission or other costs incurred for the sale need to be deducted from the sale price, before the building value is calculated.

6) If you are confident the building value is close to the closing book value, then you could obtain a registered valuation to prove this.  We frequently do this for clients, as the rating valuations are not always realistic or are out of date.  Recently a client saved over $20,000 in depreciation recovery, or over $7,000 in tax at the 33% tax rate, just by obtaining two valuations for less than a cost of $500.

Overall, don’t just accept a depreciation recovery.  Think it over, ( “Has my gain come through land or building?” and “Has my building really decreased slightly in value?”), justifying any previous depreciation claims, and meaning there should be little or no depreciation recovery.

Kind regards
Ross Barnett 

 

Lessons from the Last Boom/Peak, plus Hamilton Boom

4 October 2016

 

LESSONS FROM THE LAST BOOM/PEAK, PLUS HAMILTON BOOM


I last looked at the Hamilton median sales price in November 2015.  Below is a graph that shows the huge increase over the last 18 months:
 

  • March 2015     $350,000
  • October 2015  $435,000 -  $85,000 increase or 24% in 8 months.
  • August 2016    $493,750 -  $143,750 increase or 41% in 17 months


(Click here to view full graph on Lodge Real Estate website.)

 

 

 

 

 

 

 

 

 

 

Don't get carried away with the media and the property market!

It can come down!  Buying on or near the top of the market has added risk!

  • There is no buffer if the market comes back a little.
  • Your interest costs are higher as you have paid more.


Example 1 – Built in 2007/2008
Cost $520,000
Losing $8,000 per year
Had to sell 2014
Sold $425,000
 
TOTAL LOSS = $150,000 approx!
 
 
Example 2 – Purchased new late 2008
Cost $335,000
Losing $9,000 per year
Had to sell early 2015
Sold $300,000
 
TOTAL LOSS = $98,000



I recommend being very careful if buying at the moment.  Make sure you have a clear strategy and a buffer for extra costs or if interest rates go up. 
 
I would personally only buy if the property was cash flow neutral or better, or if I had a short term strategy to turn it positive.
 
Otherwise you are gambling on prices going up – They may do, or they could go down too!



CASH FLOW IS KING!!!
 

For both of the above examples where property investors lost money, the properties were very negative and costing a lot of cash each year.

While we always hope everything goes well, if things go badly and you get sick, or lose a job, then funding negative rentals can be very hard!
 
If you are buying long term rentals at the moment, I feel you need to be buying a property that is neutral at worst, or else negative at the moment but you have a short term plan to convert this loss into a profit.  By subdividing, or adding a minor dwelling, for example, or paying down large amounts on the mortgage.


 
COMPLETE PROJECTS
 
I hear all the time, that “we can add a minor dwelling later to improve cashflow”, or “we can subdivide this long term and sell the section to improve cashflow”, or similar comments that there is a project that can be completed to improve cashflow.
 
After the last boom in late 2007, the banks changed their lending criteria and made it a lot harder for investors to borrow.  Therefore, a lot of investors who had these possible projects, could no longer get the finance to do them.  So rather than having a house, with a minor dwelling making cash each year, they were left with a negative rental that was dragging them down.
 
If you have possible projects that can improve your cashflow, I suggest you try to finish them now.


INTEREST RATES – Don’t put all your eggs in one basket!
 
No one has a crystal ball, and no one knows what will happen with interest rates.  Everyone is guessing.
 
Therefore, I generally suggest using a spreading approach and have some loans short term, some medium, and some long.  The idea is to ‘not’ have all your loans coming up for renewal at the same time, otherwise if rates change all your loans could be affected.
 
With a spreading approach to interest rates, you win whether rates go up or down!


BUYING OPPORTUNITY
 
When the market peaked in late 2007, there were quite a few buyers who had stretched themselves too far.  As property prices failed to go up over the next year or so, these buyers became more under pressure as they were putting in cash each week to top up their negative cashflow properties, but not getting the capital gains they needed.  Last boom it seemed to take 2-4 years for these buyers to get further and further in trouble, and then finally to sell when they were desperate. 
 
Therefore, there was great buying around 2009 to 2011, when there were quite a few desperate vendors in the market.
 
If you think the market will crash, or even go flat for a number of years as it did 2007 to 2014
(Rest of New Zealand excluding Auckland), then a good strategy can be to wait for 2-4 years after the boom and try to find some bargains.
 
I hope you found this useful
 
Kind regards
Ross Barnett

Are You Getting These 3 Rentals Basics Right?

9 September 2016

ARE YOU GETTING THESE 3 RENTALS BASICS RIGHT?

Many of you would have heard me talk about interest rates and strategies to reduce mortgage risk.  With interest being a property investor's major cost, this is a critical area to review and discuss.


Here is a link to a recent article in the NZ Herald that suggests interest rates could go up.  This is probably the first hint I have seen that interest rates could go the other way, as most people and experts seem to think that interest rates will still go down.  There are arguments to support interest rates going up and down, and really no one has a 'crystal ball'.  In August, the OCR went down 0.25 to 2%, but this had no effect on fixed interest rates, and there was only a tiny movement in floating rates.

My opinion:  I can't see fixed interest rates going much lower, as evidenced by the recent OCR change having no or minimal effect.

Can interest rates go up?  YES - the New Zealand housing market is booming, so our overall borrowing is going up and up.  This money needs to come from somewhere, and a lot of our New Zealand banks' borrowing is from overseas.  Therefore, if the cost of borrowing from overseas goes up, then our interest rates would rise.

OVERALL - THERE IS NO CERTAIN ANSWER AND ONLY TIME WILL TELL.

So, my approach is to spread mortgages and terms.  I like the old saying "don't put all your eggs in one basket".  An example of $920,000 borrowing might be:

  • $20,000 revolving credit that you aim to pay off over next 12 months
  • $300,000 fixed for 1 year, at around 4.25%
  • $300,000 fixed for 3 years, at around 4.3%
  • $300,000 fixed for 5 years, at around 4.8%

Under this approach, if interest rates go up, you have some long term protection for 3 and 5 years.  If interest rates go down, some of the loan comes up in 1 year so that you can take advantage of the lower rates.  Either way, you WIN!

 

NEW LANDLORD RESPONSIBILITIES

SMOKE ALARMS

From 1 July 2016, landlords are required to have working smoke alarms installed in all their residential rental homes. 
Any replacement alarms installed after 1 July 2016 need to have long life batteries and a photoelectric sensor. 
Hardwired smoke alarms are also permitted. 
Tenants will be responsible for replacing batteries in the smoke alarms and informing landlords of any defects. 
Click here  for more information.



INSULATION

Landlords are responsible for ensuring that insulation is installed in their rental homes and that it meets the Residential Tenancies Act requirements
All landlords are required to provide a statement on the tenancy agreement about the location, type and condition of insulation in the home for any new tenancy from 1 July 2016. 
Installing conductive foil insulation is now banned.  
Failure to comply with the regulations is an unlawful act and the landlord may be liable for a financial penalty of up to $4,000. 
For most rentals, they must have ceiling and under floor insulation installed up to standard by 1 July  2019.
For more information,  click here.


Kind regards
Ross Barnett

 

Could You Save 44% on Insurance and Get Better Cover?

19 August 2016

Could You Save 44% on Insurance and Get Better Cover?

Insurance costs have obviously increased a lot over the last few years and insurance cover is in the media a lot at the moment as some insurance companies only cover up to $25,000 for Meth damage or remediation.
 
Waikato Property Investors Association has recently taken on a new insurance sponsor who specialises in Rental Property Insurance, Initio.  (For more information:   https://rentalpropertyinsurancenz.co.nz/)
 
Below is a comparison between my current insurance on a rental property with NZI vs a quote from Initio.  I have tried to compare apples with apples as much as possible!
 

Big differences

  • Initio is cheaper.  $664.62 less or 44% savings!
  • Initio has a lower excess.  $250 less
  • Initio has unlimited Meth Damage
  • Initio has higher landlords contents and Public Liability cover.

 
 
Full comparison and information

Current insurance with NZI: Initio
1960's house Same house 1960's
212m2 house 212m2 house
Estimated Sum Insured $435,500 Estimated Sum Insured $435,500
Landlords Contents $10,000 Landlords Contents $20,000
Excess $750 plus extra $150 if rental, so total of $900 Excess $650
Loss of Rent $20,000 Loss of Rent $20,000
Landlords protection (which I think includes Meth $25,000) Deliberate Damage $25,000
Meth - Unlimited cover
Public Liability $1 million Public Liability $2 million
Total Cost $1,505.04 GST inclusive Total Cost $840.42 GST inclusive


Kind regards
Ross Barnett

Simple Meth Testing Information to Keep Your Rental Safe!

8 August 2016

Simple Meth Testing Information to Keep Your Rental Safe!

There is a lot of talk out there about meth contamination and possible issues for landlords and property investors.  Personally,  I really don't believe that Meth has to be that big an issue.  Here are a few key points:

  1. Make sure you review your insurance to ensure you have adequate Meth insurance and are fully covered, including Loss of Income, before you get any meth tests done.

     
  2. Get a Meth screening test done for under $200. 
     
    • This is just a Yes/No test.  It detects if Meth is present or not.
    • The reading is meaningless.  For example, 0.3 could still be a problem, as one room could be 2 and the other rooms nothing, resulting in a combined screen test of 0.3

       
  3. We are finding that screening tests are about 20% positive.  So 80% will be negative with nothing else required to do.

     
  4. If your screening test is positive, talk to your insurance company:  They should cover the main test, less the excess.

     
  5. The majority of main test results are coming back under the threshold of recommended guidelines.  So, again, there will be nothing else required to be done.

     
  6. If, however, further action is required, and you have made sure you have the right insurance cover (see point 1), then your insurance company will fully cover you and any fix up costs and/or loss of rental income will be paid by them.


So, if you follow these simple steps, there should be no problems!


I have recently set up Get A Meth Test Ltd, a small Meth Test company that specialises in helping landlords with testing.  Our team has been trained by industry leading InScience Ltd, and only does testing, not remedial work.

During August and September 2016, we are offering a special rate of $150 + GST for Meth screening tests.

  Click here or call Get A Meth Test on 027 514 0514 for more information.



Kind regards
Ross Barnett

House Prices, NZ Dollar, about to burst?

22 July 2016

 

House prices, NZ dollar, about to burst?

This is a quote from David Hisco, CEO of ANZ New Zealand, taken from an article in the NZ Herald on 20/7/16:

"In the quick snack media world we live, sadly many are making decisions based on the last headline or quote rather than research and facts. Here is a fact: property markets can and do go backwards."


I found this article very interesting, so have a look ...

http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11678081

So many people are saying the property market is risky, so it's just a matter of being careful!


Kind regards
Ross Barnett

40% deposit required for Property Investors

19 June 2016

40% deposit required for Property Investors

Wow! I'm amazed that the Reserve Bank has finally done something!

From 1/9/16 property investors will require a 40% deposit. Also the Reserve Bank wants banks to start applying this new policy straight away.

This is going to make property investing very hard for new investors, as they will either need a large cash deposit, or else great equity in their existing personal home.

Past scenario (non Auckland)

Personal house worth $600,000, say current debt of $400,000 - Bank would lend up to 80% or $480,000, so $80,000 available

Could buy an investment property for $400,000 with 100% debt - Bank would lend 80% or $320,000 plus use the $80,000 from personal house.

Total assets $1 million and total debt $800,000, so at 80% Loan to Value Ratio (LVR)

Current scenario banks are likely to adopt from today

Personal house worth $600,000, say current debt of $400,000 - Bank would lend up to 80% or $480,000, so $80,000 available

Could buy an investment property for $200,000 with 100% debt - Bank would lend 60% or $120,000 plus use the $80,000 from personal house.

Total assets $800,000 and total debt $600,000, so at 75% Loan to Value Ratio (LVR) overall

So in this example, the investors buying power would have halved!

Existing investors will also find these rules tough, even if they are in a good position!

Established long term hold investor

Number of properties worth $3 million

50% LVR being $1.5 million of debt - very good and safe LVR

Want to buy a new rental for $800,000 with 100% debt.

This would move the LVR on the rentals to 60.5%, so without a personal house being included, this probably wouldn't be possible!

Debt to Income restrictions - "Wheeler also said work was also progressing on debt-to-income restrictions"

Non bank lenders - There are still non bank lenders available who are not restricted by the Reserve Bank rules, so if you are looking at buying it might be worth talking to your mortgage broker about this option.

Ross

Holiday Homes and GST Risk

15 July 2016

 

HOLIDAY HOMES AND GST RISK   

From the 1/04/11 the definition of a dwelling changed for GST purposes.  In the past a holiday home would be exempt for GST, but this change of definition most likely makes them liable for GST.  If purchased before 1/4/11, there is an amendment that excludes holiday homes, but any holiday home purchased after 1/4/11 DOES NOT have the exemption!

So, in theory, you could claim GST on the purchase of a holiday home (as long as not purchased from a GST registered vendor as then zero rating, or purchased from an associated entity as a limitation can apply), and the portion used, for the rental business.

You would then need to pay GST on rent, but could claim GST on other expenses.


Issues with claiming GST

  • Property goes up in value, so when you sell you have to pay a lot more GST than you claim.
  • Watch out for any GST registered vendors when purchasing, as compulsory zero rating (get specific advice!)
  • Often private component, which creates hassles and deemed supply rules.

So, often we recommend that a holiday home is kept out of the GST net and NO GST is claimed.


Risks        

1)  Over GST threshold of $60,000 
For example, an investor buys a multi-million dollar holiday home on Waiheke Island and it is rented for more than $60,000 for the year.  Non GST registered entity:

  • Have to GST register as over threshold, so pay GST on income.
  • Deemed supply (see point 7 below).             

 
2)  GST register entity later
For example, an investor has a holiday home in a Trust and it is rented out, but for under the $60,000 threshhold.  The Trust buys a commercial property, so GST registers.  The Trust will now have to pay GST on the holiday home rent and be liable for GST on the eventual sale.
 

3)  A Trust is GST registered with commercial property and holiday home

  • If holiday home is not rented and just used privately, then no issue.
  • But if there is a change of circumstances and the holiday home is rented, then falls into GST net.  So might just rent for 2 weeks over Xmas to get the high rent!

  General rule is not to put holiday homes in a GST registered entity.
 

4)  Leftfield result
Entity owns a commercial property, is GST registered and also owns long term residential rental properties.  In theory, there should be no issues as the residential rental properties are exempt for GST.  But:

  • rental property at Papamoa, was long term residential rental, but becomes vacant , so is rented out as a holiday home over summer.  Now falls into GST net.
  • rental property in Christchurch is rented out as long term residential rental property.  But tenant is using it as an office, so no longer fits dwelling definition, so would fall into GST net.


  5)  Farms - Watch what the dwellings are used for.

  • used as family home, will be exempt.
  • rented as long term home to farm worker, will be exempt.
  • used as short term accommodation and rented to shearers, then not exempt.

 
6)  Commercial and Residential

  • If buying from a developer, then not used as dwelling, so whole land and building is zero rated.
  • Bad from purchaser's perspective as effectively paying more!

 
7)  Deemed supply

  • Have to pay GST on deemed value of private use and could push you over $60,000 threshold.      For example, have a holiday home and received $30,000 of rent.  Holiday Home is also used for private use, and market value would be $40,000.  The rent combined with the private use market value is over $60,000, so have to GST register and fall into GST net.
  • Have to pay GST on rent and on deemed private use.
  • Would also have to pay GST on sale!


Clause 13.3

"The vendor warrants that any dwelling and curtilage or part thereof supplied on sale of the property are not a supply to which 5(16) of the GST Act applies".

If you are GST registered, be careful if this clause is changed, as it probably means the dwelling is either not a dwelling for GST purposes, or that GST has been claimed on this by the vendor, so would be zero rated.  Overall result if you're not careful is that the purchaser can pay too much.

Often it pays to check what the dwellings are used for to make sure they are exempt for GST when purchased . This especially applies to farms as per point 5 above.


Kind regards
Ross Barnett

 
 
 
 

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