Converting owner-occupied to rental property - tax treatment

[newbie investor]

Hi

I've been thinking of converting my owner-occupied property to a rental property. I currently own a separate rental property through a LTC. For personal reasons, I would like to keep these two properties separate.

Questions:
1) Does the bank need to know and why (if so)?
2) How does that affect the deductions etc for expenses/depreciation when it comes to taxes? Will IRD wonder why a owner of an owner-occupied property is claiming expenses/rental income?
3) Does IRD need to know about the conversion?
4) For home-based businesses, I understand that you can claim a certain proportion of expenses on the home (for e.g. rates/insurance/mortgage interest) that's related to the business. Is there a rule of thumb in terms of %? I am assuming such businesses can be web-based.

Thanks all for your help!

[newbie investor]

Anyone that can help with the questions please?

Hi

I've been thinking of converting my owner-occupied property to a rental property. I currently own a separate rental property through a LTC. For personal reasons, I would like to keep these two properties separate.

Questions:
1) Does the bank need to know and why (if so)?
2) How does that affect the deductions etc for expenses/depreciation when it comes to taxes? Will IRD wonder why a owner of an owner-occupied property is claiming expenses/rental income?
3) Does IRD need to know about the conversion?
4) For home-based businesses, I understand that you can claim a certain proportion of expenses on the home (for e.g. rates/insurance/mortgage interest) that's related to the business. Is there a rule of thumb in terms of %? I am assuming such businesses can be web-based.

Thanks all for your help!

[Nick G]

You are asking specialised accounting advice that is unique to your situation, I suggest paying for professional advice in this case.

[Rosco]

I second the above.

You are looking at a restructure. It is important to firstly check is benefit more than the cost? Then can it legally be done? Is there options that maximise the tax (there normally would be!

4) NO rule of thumb. It depends what part of your home you are using for business. So normally based on square metre of office and business areas divided by total area of house. If office is partially used for private, has a bed or used for your PAYE job, then you would only include the business% of this office or area.

Ross

[lissie]

I did similar a few years ago. We sold our former owner-occupied home to our LTC - that's a proper sale - as the lawyer did both the buy and the sell side he gave us a discount - but it's not free! We sold at RV which the bank was happy at.

Obviously the bank was aware because we were changing ownership over properties they had mortgages over.

The IRD is seeing the LTC claim expenses against a new property it owns - nothing unusual there. IRD knows because of the LTC accounts.

I work from home and claim my home office against rates/insurance. You need to have an office with a door to it - ie a spearate space. You measure the space and work out a percentage of the total floor area as the percentage you claim.

[newbie investor]

Thanks all for the helpful answers.

I am not so much looking to restructure given that the LTC is being deliberately kept separate to own another property. Just a question of whether I can rent out a originally "owner-occupied" property and claim expenses etc and whether there's a need to let IRD (in case this raises questions about the expenses and deductions) or the bank know. In other words, there's a change of use. Is there a need to tell anyone at all?

As for working from home, when you say "office with a door", I assume a bedroom door works? My office is intended to be set up in a bedroom and the business run entirely from home/online (consultancy business of sorts) so there will not be any "reception or client meeting spaces" as such. Did IRD ever drop by to check?

I did similar a few years ago. We sold our former owner-occupied home to our LTC - that's a proper sale - as the lawyer did both the buy and the sell side he gave us a discount - but it's not free! We sold at RV which the bank was happy at.

Obviously the bank was aware because we were changing ownership over properties they had mortgages over.

The IRD is seeing the LTC claim expenses against a new property it owns - nothing unusual there. IRD knows because of the LTC accounts.

I work from home and claim my home office against rates/insurance. You need to have an office with a door to it - ie a spearate space. You measure the space and work out a percentage of the total floor area as the percentage you claim.

[Anthonyacat]

There is no requirement for a home office to have a door. Or to be an entire room. Or to be solely used as an office. These are all misunderstandings.

As an example, if half of the living room is used as an office, 30% of the time, you could claim 15% (half of 30%) of the living room space in your home office calculation. If the living room in this instance was 20% of the total floor space of the house, you would have a 3% claim on rates, insurance, mortgage interest, etc...

I've never had the IRD drop by myself or any client to audit the size of the home office, but by including it in your tax affairs it is my understanding they are entirely within their right to do so.

[Rosco]

During an audit we have had a clients home office measured by IRD. They physically came and measured the whole house, and then the business parts.

This was because the % claim was high.

Ross

[Anthonyacat]

During an audit we have had a clients home office measured by IRD. They physically came and measured the whole house, and then the business parts.

This was because the % claim was high.

Ross

Professional curiosity, Ross - did the IRD accept the office percent once they had measured the place, or was there a reassessment?

[newbie investor]

During an audit we have had a clients home office measured by IRD. They physically came and measured the whole house, and then the business parts.

This was because the % claim was high.

Ross

Thanks Ross. A question: how high was too high then?

[Rosco]

If you are having to ask that question, you are probably claiming too much.

Everyone is different and it relates to your use of your home. Some property investors hardly use there home for rental business, while others have an office solely used for rentals. Some people have kids who use the office for computer games. Some people use their office for their PAYE job (not claimable)

Overall its about being realistic.

Our client had a business with 4-5 staff using part of their home as the business office. IRD measure was more accurate than the clients measures, so the % changed slightly. But nothing major as we try to be realistic.

Ross

[newbie investor]

Thanks Ross. All very helpful.

It's more of using the home for rental / ad-hoc consultancy business. It's obviously tricky when it comes to mixed-use (as is the case for such home offices or for that matter, even official offices whereby people send out personal emails together with work related emails).

If you are having to ask that question, you are probably claiming too much.

Everyone is different and it relates to your use of your home. Some property investors hardly use there home for rental business, while others have an office solely used for rentals. Some people have kids who use the office for computer games. Some people use their office for their PAYE job (not claimable)

Overall its about being realistic.

Our client had a business with 4-5 staff using part of their home as the business office. IRD measure was more accurate than the clients measures, so the % changed slightly. But nothing major as we try to be realistic.

Ross