Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
Investor mistakes: Getting the all-important Tax and Accounting Issues wrong
Our current government is intent on kowtowing to the masses and ensuring that the “greedy and capital driven” rental investors “who make money from doing nothing but holding property”, are no longer able to make quick capital gains or deduct rental losses, and have put in place the following changes:
Brightline Test
This initially meant that if you bought and sold a property within two years which wasn’t your family home then you paid tax on any gains, this has now extended to five years.
Our feeling on this is that most rental investors are in it for the long term anyway, if they do make a profit within a two- or five-year period then they still get a major percentage of that profit after paying tax, and any gain is a good one.
One mistake people make in this area is to purchase a property to hold and then change their mind, this can result in gains that are taxable or with market movement, even losses which may not be able to be accessed due to the “Ring Fencing” explained below.
It is important to talk to your accountant whenever you are buying or thinking of selling a property to ensure that you don’t get caught by these rules. At Monteck Carter we can advise how to avoid getting caught by the Brightline Test either on purpose or by mistake.
Ring Fencing of Losses
This legislation is not enacted yet but has been through the house and is expected to be in place by the end of March 2019. As you will hopefully be making your properties cashflow positive then this may not affect you, but it is good to have some awareness of what it is all about.
This legislation only relates to residential rental property losses and excludes where someone is renting out part of their home. All residential rental property losses and gains can be accumulated in an individual, company or trusts tax return but they cannot be deducted from income from other sources such as investment income or income from salary and wages.
As this legislation has not been passed yet, we do not have the final detail on how it will work but if you have high residential rental property losses it might be worth having a chat with us. It is proposed to take affect from 1 April 2019 and the anti-avoidance clauses will not allow for restructuring of rental properties or debt, after that date if the restructuring is principally done to avoid the impact of this change. So, if you are concerned contact us now for a review. Our website is www.mc2ca.co.nz.
Tainting rental property investments
The tax rules around whether a property is a buy and hold (rental investment) or one purchased for resale are very complex and it is important that if you have any questions around how your purchase will be treated then a meeting with us to discuss it will be very prudent.
If you are currently trading property and you buy a long-term hold, it will, more than likely, be tainted by the trading business. This means that you will have to hold that investment greater than ten years to obtain a capital (tax-free) gain. However, if you buy a property for your trading business and then decide to hold it, the gain on that property will always be taxable.
And watch this space for a comprehensive capital gains tax if the Labour Government are re-elected……….
Other
There are a lot of mistakes made by property investors and we see them all – sadly too late. These can have a real effect on your overall ability to maximise your investment.
Here are some common ones:
· Claiming GST on residential rental expenses
· Not retaining accounting records
· Thinking they can do one-off developments without paying tax
· Paying cash for business expenses or workers.
· Undertaking a taxable subdivision on a buy and hold property.
Talk to both your lawyer and accountant prior to buying or selling any property, or if you are unsure of anything else. A quick phone call can ensure you are doing things correctly and avoid these common pitfalls.
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