What do you need to be aware of when changing your property from owner-occupied to a rental investment property?
Here’s a fairly common story – You purchase a home to live in and it is great! A few years down the track something happens and your circumstances change. Maybe you get a job opportunity in another part of the country, or family circumstances require you to move, or perhaps you decide to move in with a new partner. Maybe you just need a bigger or smaller home. But you love the property that you live in, and really want to keep it.
You may be in a situation where you can afford to keep your existing home and rent it out, and also purchase a new home. There are a few things to be aware of when deciding whether that is the right route for you to take. The decision about affordability can be complex as there may be factors that you would not have thought of considering that may cost you. The bill may not be cheap!
Here are 3 things that you need to consider as part of making the decision:
1.What are the tax implications of the turning the home into an investment property? The full tax implications may even require you to assess whether the ownership structure is still relevant. This can lead you to need to get legal advice also.
2. If the property is no longer an owner occupied home, then you will need rental insurance on the dwelling. If you are turning the property into an Airbnb, then it will require full commercial insurance. An Airbnb can have GST implications as well. So again, make sure you discuss this with your accountant.
3. You will need to tell your Mortgage Adviser so that they can inform the banks if appropriate and get you the finance. The lending structures may need to change. The Reserve Bank of NZ lending rules set the minimum deposit of 40% for investments and 20% for owner occupied. There are other options outside of the main banks, that will allow higher lending ratios.
This blog aims to give some high-level reasons why you need to engage your team of experts to protect you. This blog is not providing you with accounting, legal or financial advice as everyone’s situation will be different.
If you get a desktop or registered valuation of your property when you shift out of the property you may reduce the tax bill you have when you sell the property. Especially if you sell the property and you are within the bright line test period.
What is this bright-line test?
While you are living in the property the bright line test does not apply. The bright line test applies to investment properties. The basic rule being that if you sell an investment property in less than 10 yrs (depending upon when you purchased the property) you will need to pay tax on the income you get on the sale of property.
You DO NOT want to avoid paying tax, however you are entitled to minimise the amount of tax you need to pay. There are no tax implications that relate to any increases in the value of your home while you live in it. However, the moment that you turn the property into an investment property any further increase in value is taxable if you sell the property within the bright line period. You may have no intention of selling the property within the bright line period… but your circumstances have already changed to turn the property into an investment property, so you want to prepare yourself in case your circumstances change again.
To determine what the value of the property is at the time you turn it into an investment property you should get a valuation. A desktop valuation or a registered valuation will be sufficient. If the bright line test requires you to pay tax on the increase in property value, you can use this valuation to determine the value of the gain.
Without this valuation you could find yourself without a way to confirm the value of the property at the time you turned it into a rental, and this could mean you end up paying more tax than you need.
Working with your Accountant and Financial Adviser can save you money and stress.