Q

We signed up to purchase an existing property just a few days before the Government announced its proposed changes to the bright-line test and interest tax deductibility rules applicable from March 27. The property was settled in April at which time we drew down the mortgage that had been approved by the bank in mid-March. What is our position in relation to tax deductibility of interest. Are we subject to the phase down through to 2025 or does deductibility cease after September 30 2021?

A

There is a short answer to this. You are subject to the phase out of interest deductions through until March 31, 2025. On the basis you entered into a binding contract to buy this property before March 27, 2021, the fact that you settled after this date and drew down the loan after this date, does not mean you are then subject to the automatic denial of interest deductions from October 1, 2021. The loan is treated as effectively relating to an existing rental property, allowing you to claim interest deductions on a phased out basis over the next three or so years.

—Matthew Gilligan

Asbestos Removal

Q

Please advise if the asbestos removal costs for an old rental property is tax deductible? What if it was a private home and will be used as a rental after renovation (including asbestos removal)? Will there be any differences re tax impact?

A

Firstly, if the property is private and the costs incurred are in relation to making it fit for purpose as a rental they are private and domestic costs as there is no direct nexus with income. Only maintenance costs associated with maintaining the property while a tenancy is in place are deductible. The same applies to dilapidation repairs, the term given to describe works done to a property post acquisition pre-tenancy.

When determining whether works to any property are deductible you first identify the asset. In this case the asset is the building as the asbestos forms part of the building rather than constitutes an asset in its own right. Secondly, you need to consider whether the works go above and beyond what could reasonably be considered maintenance of a building. This is the hurdle the IRD have used to thwart many leaky building remediations. Finally, back to the dilapidation repairs … if the property was purchased with xknowledge that the asbestos would need removal the price would have reflected that, so the costs would be capital works improving the home. The mere passage of time does not alter that. As stated, given the works are occurring whilst the home is in private use, there is definitely no deduction.

— Mark Withers

Funding Issues

Q

I put down a deposit on an off-the-plan home which will be completed mid next year, but due to the changing legislative requirements for lending, I am finding it extremely difficult to get funding for this. Do you have any suggestions around how to best present a mortgage application in the current environment and is it best to try a non-bank lender?

A

There is a good chance that the issue is the lender that you are dealing with. We are still having success and finding it common to still be able to place these. Some lenders have definitely tightened up in this space so it could just be that this is the lender or lenders that you have happened to come across. In regards to non-bank funders, while I am a massive proponent of this type of funding, they aren’t that good in the turnkey/off the plan market as they don’t offer approvals which last long enough. In this case a bank solution would be best.

— Kris Pedersen

Rent Refusal

Q

My tenant is moving out and refuses to pay one week’s rent that was due. He insists it is deducted from the bond. Can he do this? There is only three weeks’ worth of rent in the bond — with one week in rent arrears, there is only two weeks’ bond left. If the house is in a mess (which I have repeatedly asked to be cleaned), I am uncomfortable with only having two weeks’ bond. Can I request for the rent to be paid? Is it true that having rent arrears deducted from bond is not good for rent history?

A

This can be a common problem, especially towards the end of a tenancy. You need to reply to the tenant advising them that you don’t hold the bond — Tenancy Services do, so you don’t have access to it. At the same time advise the tenant that it is a breach of the Residential Tenancies Act for them to not pay rent. If they continue to request that you take the rent arrears from the bond you should serve them with a 14-day notice for ren arrears as soon as possible. Do not agree to take the rent arrears from the bond before the tenancy has ended and you have completed a final inspection. As you have rightly pointed out, by doing that there may not be enough bond left to cover any other issues that come to light.

— Ryan Weir

Renovation Claims

Q

Based on the new changes, what can I claim as part of a renovation, i.e. replacing new carpets, new paints, curtains and then Healthy Homes Standards items—heat pumps, removal of draughts, extractor fans, etc?

A

There is arguably no area of tax law more contentious than the distinction between nondeductible capital expenses and deductible repairs and maintenance. The facts are important, including whether the work is part of a larger project that is of a capital nature overall, or a series of unrelated pieces of work that you will carry out over a period of time.

Key points:
a. There is no tax concession for bringing up a rental property to comply with Healthy Home Standards. The general rules apply.
b. The general rule is that you first need to identify the asset in question. Then you ask whether the expense results in a replacement, renewal or reconstruction of that asset or changes its character, which would mean it is capital and non-deductible, or whether it is a repair, restoring to original condition, meaning the expense is deductible.
c. Sometimes the asset is the dwelling. In that case, painting, for example, could be considered a repair because it does not change the character nor represent a replacement, reconstruction etc.
d. As for carpet, curtains and heat pump, they are generally regarded as separate assets from the dwelling and subject to the depreciation rules. You either claim depreciation deductions over time, or potentially write off the cost completely if it falls below the $1,000 low value asset threshold.
e. An extractor fan could also be depreciable if it’s a through window type.

In summary, there is not one answer across the board, so seek advice before taking a final tax position.

— Matthew Gilligan