Authorised Financial Adviser, Deborah Carlyon outlines the important changes coming to tax laws on home investment properties.
The home ownership tradition is ingrained in New Zealanders - buy something modest to improve, a comfortable home that reflects your style and grows your equity. If your renovation adds more value to the house than the dollars it cost, you should be able to sell in a few years with enough extra money for a more expensive area or a bigger house.
Most renovations are designed for personal preference with a casual eye on future resale value. If so, the gains on selling a private family home are tax free and can be ploughed back into the next home.
Buying to renovate an investment property may be very different. If you buy a house, live in it and renovate it, there will usually not be any tax consequences when you sell.
However, although New Zealand has no capital gains tax as such, our tax laws focus on the intention when you purchase.
If individuals buy a house with the intention of resale or there is a regular pattern of buying and selling homes (even if they live in them), then this may be considered property speculation or dealing for tax purposes. In that case, any money made will be taxed as personal income in the year of sale.
Most owner-occupiers are unlikely to be caught out with a tax demand from IRD. However, if you buy a second home as an investment, the law is set to change from 1 October 2015.
A Bill now before Select Committee, aims to ensure that people buying and selling residential property for profit, pay their fair share of tax. Specifically, there is a range of measures to crack down on property speculators who sell houses within two years.
Furthermore, in an effort to comply with global money laundering regulations and to gather data on the hot topic of overseas ownership, foreign buyers will have to register with IRD, have a NZ bank account and provide their overseas tax number and passport details. There may also be a withholding tax for non-residents selling property.
Some of the proposals of the Bill are:
- Providing IRD with extra funding for compliance and enforcement of current rules – policing the existing “intentions” test
- Requiring non residents, and New Zealanders buying and selling property other than their main home, to provide a NZ IRD number as part of the land transfer process
- Introducing a new “bright line “test to tax gains for residential property sold within two years of purchase regardless of intention when bought, unless it is the sellers main home, inherited or transferred in a relationship property settlement.
Note that the new bright line test doesn’t nullify the existing “intentions” test.
If you buy a second home or a rental with the intention of selling for a gain, holding onto it for longer than two years won’t remove your tax liability. The taxable profit takes into account the purchase price of the house plus renovation costs, so keep good records.
If you are buying a true rental investment, be clear from the outset. Ask a rental agent for an assessment and talk about your renovation plans. The goal should be to increase the rental income.
Creating an extra bedroom and bathroom is the most obvious way, especially in a central city flatting area where each bedroom in a villa could command at least $180 per week. That extra $9,360 annual rent could service new borrowings of $150,000. Conversely, if your house is to appeal to a family, then an extra living space with indoor-outdoor flow to a nice garden and a garage should command more rent.
The best advice I have for landlords is to consider whether they would want to live in the house themselves. It can be a modest house but it needs to be clean, fresh and comfortable. If you upgrade the bathroom and kitchen, add insulation, a ventilation system and a lick of paint, it won’t be difficult to find good tenants.
Your investment property may be the tenants’ first home. If it is appealing to them it will also be popular with first home buyers in the future if you ever grow tired of being a landlord.
A new direction is a valid reason to sell, but if you change your mind within two years, be ready to pay tax on the profit.
Deborah Carlyon is an Authorised Financial Adviser. This column does not provide personalised advice. Her Disclosure Statement is available on request and free of charge by emailing email@example.com.
This article by Deborah Carlyon featured on page 26 of Issue 016 of Renovate Magazine. Renovate is an easy to use resource providing fresh inspiration and motivation at every turn of the page, for ardent renovators seeking to integrate the latest products and technology into their homes.
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*All information is believed to be true at time of publishing and is subject to change.
Deborah is a Certified Financial Planner (CFPCM), a member of the Institute of Financial Advisers (IFA) and an Authorised Financial Adviser (AFA). She is a principal of independent advisory company Stuart + Carlyon. This column does not provide personalised advice. Deborah’s Disclosure Statement is available on request and free of charge by emailing firstname.lastname@example.org.
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