Whether to sell current home or use as a rental

[jace the ace]

Hi I'm after some advice on wether to sell my home or use it as a rental.
I've got a nice modern 2 bedroom unit in East Auckland which has a value of approx $350,000 and would rent for approx $350 p/w.The only extra outgoings on top of the standard ones is approx $1,000 for body corp fees.
I work from home so claim 50% in home office expenses.I'm looking to move to a slightly bigger place for around $550,000.00 and I'm undecided on wether to keep my unit as an investment & sell it to my LTC as I think it will appreciate in value or wether to sell it and put that money towards a new PPOR.
The other option if people don't think it's agood time to buy would be to sell my 2 bedroom unit then rent somewhere whilst the money from the selling my unit was earning money from being invested in a term deposit for example.

[buxlo122]

I think you have to way up your risk profile:
1) Keeping the unit as a rental will see a higher mortgage. However a large upside for potential capital gains.
2) Selling the unit and buying a larger property will is the safer option with a lower mortgage.

You need to way up your ability to service debt, future interest hikes, weather the bank will lend you the money (self employed, working from home?), how long you plan to stay in the home, kids, girlfriend/wife.

I think alot of PTers wished they had leveraged more when they started out investing, however hindsight is a wonderful thing.

Personally If I could service the debt and had sufficient equity I would sell your current unit, buy the larger personal property, then look for a high yield investment property, purchase it using 100% finance interest only loan using PPOR as security, then pay down remaining mortgage on PPOR as quickly as possible.

[kapitibeanman]

This is a great site to get good ideas, as long as it's not how to spell.

It's worth it, I keep telling myself.

[speights boy]

If you kept it, and bought for 550; what would your LVR on the combined 900k be?

With the two properties , what would your property related outgoings be as a % of gross income (include the 350 rent) ?

[jace the ace]

My LVR would be about 60%.
The existing property would have 100% mortgage($350,000) interest only with the usual other expenses such as rates($1,500),insurance($500),body corp fees($1,000) & repairs and maintenance($1,000).
The proposed purchase of a new PPOR would have a $200,000 mortgage of which 50% of the mortgage interest will be tax deductible as home office.

[speights boy]

If I was happy with the unit, and if my household income was north of 90k gross pa (excluding rent income); I would look at keeping it.

[kapitibeanman]

Whether or not the IRD would smile upon a 50% deduction rate would depend on what %age of your residence was home office space, wouldn't it?. About 15% is the highest I've ever felt able to claim - perhaps I'm being too conservative, or perhaps you have a jolly big office & a jolly small residence. 50% would be inviting attention, I would say.
Thinking about the risks. Could you survive & still thrive say interest rates doubled? And insurance. If not, & you had to sell, it would likely be into a lousy market.

[Neongreen]

Whether or not the IRD would smile upon a 50% deduction rate would depend on what %age of your residence was home office space, wouldn't it?. About 15% is the highest I've ever felt able to claim - perhaps I'm being too conservative, or perhaps you have a jolly big office & a jolly small residence. 50% would be inviting attention, I would say.
Thinking about the risks. Could you survive & still thrive say interest rates doubled? And insurance. If not, & you had to sell, it would likely be into a lousy market.

RE the tax deduction, as far as I know, it's the % of floorspace of your house that is 100% dedicated to business use. So if you have a separate office that you ONLY use for work, you can claim that % of the floorspace against your bills.

[kapitibeanman]

RE the tax deduction, as far as I know, it's the % of floorspace of your house that is 100% dedicated to business use. So if you have a separate office that you ONLY use for work, you can claim that % of the floorspace against your bills.

Yes, that's my understanding too.

[Perry]

It has been stretched by some - probably not PIs.
Toilet, passage and lounge where clients call and
business is transacted @ home.

Jace, what ever you decide, do get the audit trail
right so maximum deductibility is available. That
way you'll be able to whether, wether, wotever
any audit that may come along the weigh.

[Neongreen]

Perry, my understanding is that the floorspace cannot be used for any other purposes. Unless the toilet, lounge, and passage are exclusively used for work they cannot be claimed. But I'm sure people try and get away with it.

[kapitibeanman]

Perry, my understanding is that the floorspace cannot be used for any other purposes. Unless the toilet, lounge, and passage are exclusively used for work they cannot be claimed. But I'm sure people try and get away with it.

Anyone can get away with it. Until they are caught, that is.

If I was ever inclined to bend the rules, after I had a conversation with one poor soul I changed my approach for ever. He had been on the receiving end of an IRD audit, and his emotional description of his travails chilled my blood. The audit eventually finished him off financially, after all his short-cuts and clever tricks were ruthlessly dragged into the light and examined minutely. He was like an Allied spy in occupied France during WW2 that had been captured by the Gestapo. He started crying as he was telling me about it. And no, he had no money to buy any insurance off me either, but that was another story.

Just DON'T tinker with the rules, and be honest, and you will have successfully eliminated a serious business risk, that was the message I took away from that encounter. It might mean a slightly higher tax bill, but money well spent I reckon.

Another good tip I picked up, from someone else this was, if you are going to abuse some moron and give them the fingers for annoying you in traffic, first check that they are not an IRD inspector.

Particularly if your licence plate is visible.

And for pity's sake, if you get plastered at some function, just make sure you don't skite out loud about your clever (lamebrained) dodge for increasing your personal wealth at the expense of muggins law-abiding tax payers. Realise that 7 degrees of separation doesn't apply in NZ, its more like 2 degrees from the Commissioner of The IRD, or 1 degree from Patrick Goggin (who is a nice fellow with a straightforward attitude).

That's more advice than what was asked for, apologies. Perry, I think I'm way out of line.

[Perry]

Not at all. The person I heard tell of was a lawyer
who operated from home. The tale was twice-told
and it was long ago.

Maybe there was a percentage claimed of common
areas? I don't know. But it's not hard to imagine
validly claiming an allowance for more than just
the office.

Where will clients wait? Most homes don't have any
waiting room. Perhaps the wife may offer coffee and
a biscuit to waiting clients? Where will they wash
their hands?

Spaceman is good at demonstrating that - while the
IRD may adopt certain stances - those stances are
not always beyond reproach.

The IRD often get it wrong by erring on the side of
greater tax revenue. I keep an ever-growing list
of IRD try-ons that have been reported in the media.
The hapless Willis' being the most sordidly spectacular.

Here's one:
Appeal Court Raps IRD For 'Futile' Case
30.06.05

Court of Appeal judges have criticised the Inland Revenue Department
for raising futile arguments over the tax status of the Wellington
Regional Stadium Trust.

The department's commissioner is appealing against a High Court ruling
that the trust's dominant purpose is not to make a profit and it is,
therefore, exempt from paying tax. The trust is a charitable
organisation that makes profit only to reinvest in running the Westpac
Stadium.

IRD lawyer Andrew Beck said the trust was a council-controlled trading
organisation and should pay tax on its profits.

But all three Court of Appeal judges who heard the appeal made the
point that it was not set up as a business to make a profit and could
never be expected to make one if it had to pay a return on the $40
million in Wellington City Council and Greater Wellington Regional
Council interest-free loans that funded the stadium.

Beck said the trust was claiming it was doing extremely well. It
carried on as a business, had a business plan, produced annual reports
and made a profit on its activities.

Justice Susan Glazebrook said hospitals, the Red Cross and other
charities operated that way as well.

The only way it was able to operate as a business was that it had free money.

It wasn't a business in any sense of the word and there would never be
a business if it was required to provide a return on the capital.

When Beck agreed that if it was required to pay a return on capital
invested it would be unlikely to make a taxable return in the
foreseeable future, Justice Mark O'Regan said it begged the question
as to why the commissioner was taking the case.

He said the trust could not operate if the court declared it to be a
trading organisation. That would be a nonsensical outcome and
suggested the action was futile.

Justice O'Regan said the reality was that the stadium cost $100
million to build and that would never have happened if it had been
funded on commercial terms.

Justice Bruce Robertson said the commissioner's submission had an air
of unreality and the suggestion these people were trying to make money
defied reality. To say the trust was there to make a profit was
drawing a long bow. The court has reserved its decision.

I do not have the reserved decision determination.
That item is six years old. I don't have a link. I've
quoted the text in full based on those two reasons.
Copyright is/was with the NZPA.

Here's another:

"Back off," Judge Tells IRD

The Inland Revenue Department has paid a woman $5,000 damages,
plus interest, after being told by a High Court judge to stop wasting
public money fighting a three-year old privacy case he did not believe
it could win after the Complaints Review Tribunal had earlier awarded
her $5,000 damages.

Inland Revenue tried to get the complainant's case struck out by
the tribunal without a full hearing. They failed. They then fought
the claim at the tribunal and lost.

They appealed to the High Court and lost again. They sought to get
yet another appeal. They have now lost that. The observation was
made that the woman might well have found she could not compete
with the department's [tax-payer-funded] bottomless pockets.

- abridged. My best date guess - circa 2007.

Yes, I do appreciate the IRD may win more than it loses. Especially
with the department's [tax-payer-funded] bottomless pockets.

[kapitibeanman]

I'm a congenital coward, and can't see much percentage in buying into fights with the IRD. I'm more partial to expending what energy I have on less deadly pursuits.
What was that book Rodney Hide wrote about the IRD - I remember the tale he recounted of a Wairarapa clothing manufacturer treated really badly by the Department. The result of the nasty stuff was to throw dozens of people onto the dole when the business went down, to the detriment of everyone involved including you and me the tax payers. There may be someone that was involved that could comment on that. It seemed a real abuse of power at the worst, or blindingly stupid at the best. It involved GST.
I do think it's a good idea to budget conservatively, and not be too concerned to get the very last drop of profit from every situation. I think that following a slightly relaxed approach makes it more enjoyable for all parties, and it's far more likely to be sustainable in the long term, hence more profitable anyway. I just can't see the attraction of an investment career based on pushing rules to the limit all the time. Just the thought of a lifetime of arguments and chiselling would have had no appeal for me.
I'm not saying that if you disagree you are an argumentative chiseller. Not really.

[Neongreen]

I currently use about 10% of my floorspace for my business. To me, doing the maths, it really doesn't add up. The couple of dollars a week in tax I'd save would be more than outweighed by the time I spent calculating everything, so I just kind of shrug it off. I don't bother with the small stuff because by the time the accountant processes it at $150ph it really slaughters a lot of things.