Renting out my home...

[solavox]

Hey guys

I have a question for any Upper Hutt based investors (but not exclusively... ).

I am just finishing off some minor maintenances items for my home to get it ready to rent out.

Typically, how long does it take to get people interested generally - a bit of a 'how long is a piece of string' question... but keen to hear what peoples experiences are right now.

Cheers

Solavox

[ENP]

I'm looking for a flat in Auckland. I text/phone/email about them twice daily. I'm sure there are many more people looking for accomodation like me.

So I'd give it 12 hours.

I heard if you own your own home then move out and rent it there are different tax rules, etc so I'd advise you to read up on that. More experienced PI's might chime in with their 2 cents on that one.

[solavox]

From extensive reading - my understanding is: as soon as the house is rented out, the purpose of the loan is to sustain a rental property and not my PPOR. The interest becomes a tax deductible expense, the equity/extra payments above the interest costs are not.

I think there was a state of confusion on this tax issue some while ago, which eventually was cleared up by the IRD.

Thanks for coming back to me.... any one else renting out recently and can tell me how long it roughly took to find a suitable tenant?

[graemeh]

From extensive reading - my understanding is: as soon as the house is rented out, the purpose of the loan is to sustain a rental property and not my PPOR. The interest becomes a tax deductible expense, the equity/extra payments above the interest costs are not.

I think there was a state of confusion on this tax issue some while ago, which eventually was cleared up by the IRD.

Can you provide any references to back this up?

My understanding has always been that it's the purpose the loan was advanced for that is the first test. If it was advanced to buy your PPOR then you can't claim the interest expense. There are, of course, ways to work around this.

It would be nice though if what you say is true but it sounds too good to be true.

[solavox]

See IR264.

It clearly states any costs associated with a rental property are tax deductible, as long as the costs is directly related. It doesn't mention anything about the original purposes of drawing down the loan - other than you can't stick a loan for a boat on to your rental property and then claim that interest.

If I am incorrect, then I would like to see the references that state (from IRD please) that the original purpose of the loan over rules changes of circumstance.

This is an age old arguement - but if I am wrong, I'd like to cite the references with peoples thoughts in this area....

Anyway - to keep this on track, I'm interested in the time taken right now for people to rent out normal houses (ie from advertisement to selecting the tenant).

Cheers

[ChrisD]

Can you provide any references to back this up?

My understanding has always been that it's the purpose the loan was advanced for that is the first test. If it was advanced to buy your PPOR then you can't claim the interest expense. There are, of course, ways to work around this.

It would be nice though if what you say is true but it sounds too good to be true.

It's sufficient that the interest be charged on an income earning asset. The purpose of the loan at the time of incurring it isn't important. Here is a useful reference - look up the cases if you would like a more detailed understanding.

Solution 6 — Deductibility of interest incurred to purchase rental property, 06 August 2010



Background


Bellini borrows $350,000 from Renaissance Financial Services (RFS) to purchase a private residence in Rome. Bellini decides to retain his existing house in Venice and rent it out. Bellini still owes $150,000 in respect of the Venetian residence, secured against that property. The new loan from RFS is secured against both the Venetian residence and the Roman residence. The market value of the Venetian residence at the time Bellini rents it out is $550,000.



Is Bellini entitled to a deduction for interest</span> paid on the new $350,000 loan? What about the existing $150,000 loan?

Conclusion


Section DB 6(1) of the Income Tax Act 2007 provides that a person is allowed a deduction for interest. Section DB 6(4) of the Income Tax Act provides that s DB 6 overrides the “capital limitation”, but the “general permission” must still be satisfied and the other “general limitations” still apply (see Solution 3).



In determining whether the “general permission” has been satisfied, the courts generally consider the use to which the borrowed moneys have been put. This may not necessarily be the same as the purpose of the borrowing. The security for the borrowing is generally irrelevant.

Bellini has borrowed $350,000 to acquire a private residence. Bellini is not entitled to a deduction for interest incurred on this loan, as the private residence is not expected to produce assessable income. Bellini would, however, be entitled to claim a deduction for interest incurred on the existing $150,000 loan, as that loan is now being applied to produce assessable income.



Bellini could argue that he borrowed $350,000 from RFS so that he could retain his Venetian residence as a rental property. In other words, the loan has some connection with the derivation of assessable income. This indirect connection with the derivation of assessable income is not, however, strong enough to satisfy the nexus test under the “general permission”.



A similar issue arose in Borlase v C of IR (2001) 20 NZTC 17,261, where the taxpayers borrowed $208,000 to purchase a new residence. The taxpayers retained their former residence and rented it out. At the time of moving, the taxpayers had a mortgage of $23,326 secured against the former residence. The Commissioner accepted that interest referable to the principal of $23,326 was deductible against rental income. However, the Commissioner disallowed a deduction for interest paid on the rest of the loan. The High Court agreed with the Commissioner, on the basis that the use to which the rest of the loan was put was the acquisition of a private residence.



The same conclusion on similar facts was reached in Case D31 (1980) 4 NZTC 60,668, Case N63 (1991) 13 NZTC 3,483 and Case R8 (1994) 16 NZTC 6,049.



References: Income Tax Act 2007, ss DA 1(1), DA 2(2), DB 6.
CCH, New Zealand Master Tax Guide 2010, ¶7-520, ¶10-650.

Case D31 (1980) 4 NZTC 60,668.

Case N63 (1991) 13 NZTC 3,483.

Case R8 (1994) 16 NZTC 6,049.

Borlase v C of IR (2001) 20 NZTC 17,261.

[graemeh]

I don't have references, just the professional advice I've paid for. I did some digging though and found this page easypropertytax.co.nz and their "example 3" is your situation so it looks like you may be right.


Now to get back to your original topic, I rented a property recently and it took a month to get new tenants. Not the same area as you though and unlikely to be the same target market.

Our property manager has also told me that they are taking longer to find new tenants.

Of course you might have a good tenant turn up on day 1 and you only need one.

Have you had a look to see what else is advertised that is similar to your place? I find this is often a good way to guess how long it might take to get a tenant.

[ChrisD]

Anyway - to keep this on track, I'm interested in the time taken right now for people to rent out normal houses (ie from advertisement to selecting the tenant).

Cheers

With the current state of the Auckland rental market I don't think you have much to worry about. I have friends renting in Auckland and looking to find a place closer to their workplaces - there is substantial interest in every property they have looked at, and landlords are being quite picky.

I would expect that within a day of listing you should already have some enquiry, and substantial interest within a week.

[BusyLizzy]

I did this for the last 3 years when I relocated to Tauranga - all cleared and sanctioned by my accountant who is fairly experienced in property matters.

From the day I rented out my home, I claimed mortgage interest, rates, insurance, etc, as tax deductible expenses. I stopped claiming from the day that I moved back in.

It clearly states any costs associated with a rental property are tax deductible, as long as the costs is directly related. It doesn't mention anything about the original purposes of drawing down the loan - other than you can't stick a loan for a boat on to your rental property and then claim that interest.

That is my understanding from my accountant as well.

Not that it matters so much now with the new tax changes, but the one key thing was to not claim depreciation as you would have to pay it back if/when you moved back in.

[graemeh]

It's sufficient that the interest be charged on an income earning asset. The purpose of the loan at the time of incurring it isn't important. Here is a useful reference - look up the cases if you would like a more detailed understanding.

Thanks Chris. I'd just found similar (but less detailed) information to yours.

This contradicts what we were told when we started investing in property, I guess either we misunderstood or the accountants at the time got it wrong (or more likely took a very conservative approach to be able to clearly show what the loan was for).

[graemeh]

With the current state of the Auckland rental market I don't think you have much to worry about. I have friends renting in Auckland and looking to find a place closer to their workplaces - there is substantial interest in every property they have looked at, and landlords are being quite picky.

I would expect that within a day of listing you should already have some enquiry, and substantial interest within a week.

Upper Hutt is a long way north of Wellington but it's not yet part of Auckland!

[ChrisD]

Upper Hutt is a long way north of Wellington but it's not yet part of Auckland!

Oops! Wonder where I got Auckland from.

[Niall]

Hey guys

I have a question for any Upper Hutt based investors (but not exclusively... ).

I am just finishing off some minor maintenances items for my home to get it ready to rent out.

Typically, how long does it take to get people interested generally - a bit of a 'how long is a piece of string' question... but keen to hear what peoples experiences are right now.

Cheers

Solavox

Even in winter if your home looks great you should pick up enquiries withing the first few days.

There are only 69 properties for rent in Upper Hutt at the moment. (click the link to trademe)

Look at the competition, set your rent, start advertising on a Tuesday, answer all enquiries, have one open home on the first Saturday, bring application forms and pens.

Everyone looking at moving now will congregate at your house and build a level of demand. How many people hang around the longest and make lots of chit chat with you gives you a good idea how quickly you can rent the house.

Best of luck.

Niall

[Property Man]

Anyway - to keep this on track, I'm interested in the time taken right now for people to rent out normal houses (ie from advertisement to selecting the tenant).

Cheers

Hi Solavox,

Like you say the question is really difficult to answer as there are many factors.

However if your property is in good condition, the rent is fair, you should be able to rent it out within a couple of weeks.

Cheers
Aaron
Property management Upper Hutt,Lower Hutt and Wellington

[solavox]

Thanks for the replies guys

Appreciate you imparting some wisdom and experience...

....And... I think Upper Hutt is due to become part of Auckland's super city in the next 18 months....