Rental House on Owners Property

[dr99]

After a lot of evenings reading and learning from the forum, some questions for my next steps...

Current situation: living in own mortgaged home (not in trust etc), land value 450k, total GV 840k. I am in the 39% tax bracket, my wife works part time and is in the bottom bracket. All income through salary/wages.

Our house is in a popular summer holiday destination, and a large (3Ha) block.

The plan is to build holiday accommodation on our property, initially 1 house but over time maybe 1 or 2 more (i understand from council we can have up to 6 such dwellings on the property if they do not have full kitchens, but obviously would get that confirmed) . There is no intention to subdivide the property. Cost of each dwelling would likely be in the vicinity of 120-150k.

Now to the questions...

what would be the best ownership structure for us?
for costs like rates ($3500) how much would be attributed to the rental as opposed to our personal house? or driveway repairs etc.
presumably the office in our house would be an expense of the rental property?

I think that i can follow the depreciation costs, which should be fairly simple as it would be a brand new house and no land cost. And all that extra interest cost...

and finally (for my first post anyway) is there a loan structure that would work better for this situation given that 90% of rental income would likely be Dec-Feb?

Thanks in advance!
dr

ps yes I will see an accountant, but I like to have a bit of knowledge first.

[Gatekeeper]

If 90% of your income is only over three months, would it be worth it? You would need a very high nightly rate and would this be possible with no kitchen?
Apportionment of rates should be fairly simple as your rates bill will rise when you sign off your building consent, or it could be worked out on a sq mtr basis. I'm sure an accountant would have some formula.

I'm in a similar situation with two holiday rentals, but they have been subdivided off, so things are a lot more clearcut. I hold these in my own name.

[spurner]

Initial thoughts would be to keep everything in your own name, would make things a lot simpler and cheaper.

Another thing to consider is how long your tenancies will be for. If they aren't going to be at least 3 weeks long then basically you're more of a motel operator than a property investor. And in that case you'd want to form a company and register for GST and get some very good professional advice.

Good luck!

[Gatekeeper]

If they aren't going to be at least 3 weeks long then basically you're more of a motel operator than a property investor.

Length of stay is not the test. If the accommodation is a dwelling, it is GST exempt. However, if your accommodations have no kitchen then it is not a dwelling, and yes, you may need to register for GST (if turnover is over $42,000 pa).

[Perry]

A well-structured arrangement with a Family Trust will
allow a sub lease to you/wife/partnership. So long as it's
'credible,' the lease paid by you/wife/partnership to the
Trust should allow a distribution that may reduce the total
household tax. You may be able to get IRD consent for
you/partnership to pay wages to your wife for cleaning
and servicing holiday units.

Given the income earning times you mention, I'd be inclined
towards pre-fab cottages, or the like, with low capital costs,
including bottled gas for hot water and cooking.

There's a few of these 'chalet' type temporary accommodation
things about, so it shouldn't be hard to track a choice
of suppliers down.

Use check meters for electricity, if need be. Probably not
necessary if you charge by the night/week, in which case
one for all may do, to split your household costs from
the rentals.

[dr99]

Thanks for the replies.

The daily rate would be in the range of $200 - $250 per night (would rent weekly basis), although as you say something would need to be done about kitchen facilities. I need to check again with council. It would be possible to rent long term out of season, but at a much reduced rate, and would prefer to rent the odd weekend rather than have permanent tenants.

Perry - any idea what the criteria would be for a credible lease amount? That makes a lot of sense, it's not just portion of the rates it should be covering.

Thanks
dr

[spurner]

I disagree. Having a kitchen(or not), is not a test that should be considered when deciding whether GST should be payable or not!

A house with a kitchen rented on a nightly basis is considered a GST'able activity. A unit let for a long term tenant is a GST exempt activity, regardless of whether there is a kitchen in the unit or not.

Otherwise, everyone would be installing kitchens in their office buildings and factories, so as not to be liable for paying GST!

Length of stay is not the test. If the accommodation is a dwelling, it is GST exempt. However, if your accommodations have no kitchen then it is not a dwelling, and yes, you may need to register for GST (if turnover is over $42,000 pa).

[Perry]

A credible amount would relate to the asset value and
the return on that. To illustrate:

A lease payment of $NZ20k/annum on an asset valued at
$NZ2M could be deemed an unrealistic commercial figure.
It could also be deemed to be implied gifting.

Similarly, a lease payment of $NZ20k/annum on an asset
valued at $NZ100,000 could be deemed an unrealistic figure.
It could also be deemed to be a form of tax avoidance.

I suspect there's no rule of thumb beyond the 'arms-length'
test. I.e. if rented on the open market, what would a prospective
lessee be likely to pay in order to make a commercial return?

There will be some latitude, but how much is the
proverbial how long is a piece of string territory.

[Gatekeeper]

I disagree. Having a kitchen(or not), is not a test that should be considered when deciding whether GST should be payable or not!

A house with a kitchen rented on a nightly basis is considered a GST'able activity. A unit let for a long term tenant is a GST exempt activity, regardless of whether there is a kitchen in the unit or not.

Otherwise, everyone would be installing kitchens in their office buildings and factories, so as not to be liable for paying GST!

I'm not saying that is the only rule, there are a few rules to pass to be a dwelling, I would think the basic one was to have a kitchen . Self-containment is one consideration. If you don't have a kitchen it's not self-contained therefore does not pass as a dwelling.

I've done a lot of research on this, because of my situation, and the four week rule applies to commercial premises only. The IRD have recently made an interpretation on what is commercial and what is a dwelling. Have a read of this and let me know what you think.

http://www.taxpolicy.ird.govt.nz/pub...les/IS0049.pdf

Law change to reduce impact of GST interpretation
The government will introduce legislation to reduce the impact on GST-registered owners of holiday homes, home-stays, farm-stays and serviced apartments of a
possible new interpretation of the law by Inland Revenue, Revenue Minister Peter Dunne announced today.
“A draft interpretation of the law issued by Inland Revenue today confirms that holiday homes, home-stays, farm-stays and serviced apartments will not, in most
cases, be classified as commercial dwellings and will therefore fall within the exemption from GST for accommodation,” Mr Dunne said.
“The draft has been issued for public comment. If the final interpretation is along
those lines, the government will introduce a law change that preserves the status quo for owners who had registered for GST, and claimed GST for expenses associated with the accommodation, before the new interpretation is finalised.
“This means they will be able to de-register in the future in accordance with current interpretations of the law and thus postpone any financial consequences that might otherwise arise from the new interpretation.
“Interpretations of the law may change from time to time. Only Parliament, however, can change the law, and I will ask it to do so in this case, to prevent taxpayers who have acted in accordance with an earlier interpretation from being adversely affected
by a new one,” Mr Dunne said.

[spurner]

Some heavy reading there!

Looks like some people will be happy that their holiday homes can be let free of GST, if the changes do happen.

But basically:

“Dwelling” is defined in section 2 as meaning:
any building, premises, structure, or other place, or any part thereof, used predominantly as a place of
residence or abode of any individual,

My interpretation has always been that a house rented to people to live in is GST exempt. But as soon as that house is rented out as a doctors surgery or brothel or as some business then GST becomes payable on the rental, even though it is still the same house.

And the same goes for a hotel/motel.

[Gatekeeper]

Nothing has to change, as that is the IRD's interpretation of the current law.
Cheers.

[Perry]

My interpretation has always been that a house rented to people to live in is GST exempt.

Yes and no. If GST is in the purchase price,
it cannot be claimed back, even by a GST
registered person, because it's being purchased
for a non-assessable activity, if it's to be
a dwelling. (Including expenses, etc.)

But as soon as that house is rented out as a doctors surgery or brothel or as some business then GST becomes payable on the rental, even though it is still the same house.

What's going on in that hypothesis is a change
of use. It has a range of tax, as well as District
Scheme implications.