Converting garage to minor dwelling on parents property - tax implications

[AMR]

Hi all,

As a graduate fresh out of uni staring at an uncertain stockmarket and uncertain rental and capital growth for the next few years I am looking small and thinking about doing up my parents home office/garage by converting it into a minor dwelling.

The property is in my parents name, but the loan from the bank will be in my name. Will I still be able to claim deductions from the IRD?

[Green Fish]

Deductions from what? Your income from the neurosurgery practice?

Forget about it. The loan to you will have to be secured, which means that your parents must sign, which means a whole series of pointless arguments.

All you will end up doing is paying money and expending time to improve the value of someone else's property.

[AMR]

My full time engineering job...

They're still my parents, I will have to look after them in their old age so it's not "someone else's property" as you say. Also looking to gain practical experience in the ways of renovation, legal requirements around building consents, how to deal with the IRD. Better to practice here than to stuff up a 200k home and spend 6 years recovering.

Thanks for your post.

[Green Fish]

You are under no legal obligation to look after your parents in their old age, and they are under no legal obligation to leave the property to you - (although in some limited cirumstances, they may be obliged to provide something for you in their will).

My point is that you should not invest your money and your time in a property that is not yours. Even if you are an only child, what will happen if your parents separate? Or go bankrupt?

[Rizowz]

why not buy somewhere for yourself at the lower end of the market with them going guarantor? look for places where you can add the sort of value/extra income you desire. I don't consider this method considerably risky. In fact i would say it is less risky than your strategy. Family or not, GF is right - you would essentially be throwing expenditure and time into somebody elses estate and probably gifting them some free equity while you're at it - why not learn the same lessons on your own place and reap the benefits?

[Dean@Massiveaction]

More to the point AMR is that converting a garage into a legal MDU is a total nightmare. Councils spend years researching how to make life difficult and expensive and then pass that cost on to projects like this :-).

It is better to buy a minor dwellingable property and build one from scratch. I understand that is probably beyond you financially so if you are really hell bent on doing this then the first thing to check is whether the garage slab has a DPM (damp proof membrane).
If it doesn't then I'd forget the idea, it will simply cost too much.

If it does then it is probably worth getting a decent building inspector to have a look at it and advise whether it is likely you could make it legally an MDU.

But be warned you are taking on a nightmare job and it may put you off property for good!!

If you want to get a decent honest builder to look at it for you and you are in Auckland contact Stuart Shutt, owner of Investor homes. He is the biggest builder of MDU's in the country now and can advise on the viability.

As to your actual question of tax deductibility you'll need to get some specialist advice as it could be very messy being a JV and your parent current structures etc. will need to be looked at.
In theory you can set it up as a rental legally and get all the benefits but it needs to be looked at by a professional. Matt Gilligan from GRA specialises in all this stuff, contact him. www.gra.co.nz

[Rosco]

Hi AMR,

Generally property investors make their money from land! So the only reason you would invest in a leasehold property, is if the cashflow is fantastic.

So for normal leasehold property you would sign up a 100 year lease or something like that. You then build or do up the property and hope to well and truly have all your investment, plus a great return back within the lease term.

So in your case

a) You would need to buy the orginal garage/office from your parents. You could use a LAQC or Trust, or even personal ownership could work, but wouldn't be as good.
b) Sign up a long term lease, say 20 years for the land the new rental will use (ie building area plus living space).
c) Do up property, meet council obligations etc etc
d) Loan to do this in leasee's name, and most likely your parents will have to provide security
e) Rent out

Say this costs you $75,000 to building/do up. Rental return is $250 per week so $12,500 for 50 weeks.

Your basic costs will be interest $5,000 approx (presuming your parents don't charge you interest on the building sold to you), rates $500??, insurance $400??, accounting $1,000??, banks fees $50, property mgmt ??, so say $7,000. Less lease for land at fair value, I'm completely guessing, but say $5,500.

So cashflow would be $0 - so whats the point.

You run this rental for 20 years, and make $0. At the end of 20 years, the lease is over and your parents (the leasor) say thankyou very much for the asset created, and for the extra lease income every year. You lose $75,000! Plus you stil owe your parents the original purchase price for the building.

So why do it?

Tax perks are great if you are long term making something, but in your case the whole concept doesn't make sense. Great for you parents, bad for you. The tax perks would be that if you owned personally or in LAQC, that the depreciation loss would offset your personal income. Depreciation could be $7,000 approx by using a chattels valuation. So say you earn $50k, then you would get tax back at 33% which would be $2,310 per year.

Ross

[Dean@Massiveaction]

I assume Rosco is having a senior moment AMR. If his comments about leasehold confuse you don't worry, they are not relevant :-)

[SuperDad]

I assume Rosco is having a senior moment AMR. If his comments about leasehold confuse you don't worry, they are not relevant :-)

They are relevant, as AMR is not buying the land underneath the garage.

[Dean@Massiveaction]

There must be some posts missing then Paul unless I'm losing my mind, there is no reference to anything leasehold anywhere?? He just wants to turn his parents garage into an MDU?

[SuperDad]

Nothing missing, I was reading betwween the lines.

Ross began his post with the claim that generally investors make their money from capital appreciation on the land component of a property. So, in that respect, AMR's proposal is akin to purchasing a leasehold property, where the value lies in the improvements. Ross' calculations were done on that basis.

So, while AMR's proposal might not, strictly speaking, be a leasehold purchase. it is similar in important respects.

Of course, I may have misunderstood Ross' post.

[Rosco]

AMR is putting up the money to do up the building. From my understanding he has no interest in the land, therefore it is leasehold! Parents own the land, he owns the building or at least the building renovations.

[Rosco]

I assume Rosco is having a senior moment AMR. If his comments about leasehold confuse you don't worry, they are not relevant :-)

Hi Dean,

Please explain what this situation would be from AMR's point of view then? He would own the building or building renovations, but not the land, so what is this?
How is this different to a leasehold property, where you own the land and I own the building?


Ross

[Rosco]

AMR,

With any arrangements involving related parties, generally they must be done at arms length. So you need to look at the transaction as if you weren't related to your parents. In that case, what is the benefit to you?

It is probably a really good idea for your parents, so why not organise it all for them and charge a fee. They could then pay for the building renovations and own it all, which makes sense!

Then you could find a property deal for yourself. Maybe with a little help from your parents? I think this would be much better for you!

Ross

[AMR]

(Oops I replied to your PM before reading all of these new posts!)

Would it be ok from a tax perspective if I rented the land from my parents for a small amount while I subrented the improvements to a tenant?