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McLEAN AND CO.
IRD Scam Emails
Mixed Use Assets
Mixed Use Holiday Homes
Buying at Mortgagee Sale- Things to Be Aware of
IRD SCAM EMAILS
It is noticeable that a few IRD scam emails and also faxes have been doing the rounds lately. These can be quite deceptive as they feature the IRD logo, and sometimes say you have a refund available, or ask you to complete disclosure forms. Be aware!!! IRD do not communicate with taxpayers in this fashion. These are deliberate attempts to use the IRD logo and brand to steal confidential and personal information, and any information given can result in a business or individuals suffering identity and date theft and possible financial loss. If you receive such emails or faxes destroy them immediately. You can also email firstname.lastname@example.org to report them to IRD.
MIXED USE ASSETS
The Tax Bill containing
the new Mixed Use Assets Expenditure rules (“the MUA rules”) received Royal
Assent on 17 July 2013 with retrospective effect (1 April 2013 for most).
These rules significantly change the way expenditure is apportioned on so called
mixed use assets. A Mixed Use Asset is one that is - used to derive
income, used privately, and not actively used for a significant portion of the
income year. Taxpayers can no longer claim the period an asset is
"available for use" but not actually used as relating to income
generation resulting in full tax deductibility of costs during that period.
The focus is now squarely on actual use or active use with periods of non-use
ignored for the purposes of determining tax deductibility of expenditure.
MIXED USE HOLIDAY HOMES
From the beginning of the 2013–14 tax year owners of “mixed-use” holiday homes will have to work out their income tax obligations differently. You have a mixed-use holiday home if, during the taxyear, your property is used both for “private use” and“income-earning use”, and it’s also unoccupied for 62 days or more.
What is “private use”?
Private use of your property means:
use by you or your family, even if rent is paid.
use by non-associated people if you earn rent at less than 80% of market rates.
What is “income-earning use”?
Income-earning use of your property means use by a non-associated person from which you earn rent at 80%or more of market rates.
Visits for repair work
If you stay in your property to repair damage caused by tenants during “income-earning” days, your stay is also counted among your “income-earning” days.
If your income from income-earning use is less than $4,000 for the year, you can opt to keep the holiday home outside the tax system. That means your rental activitydoesn’t need to be included in your income tax return. You don’t return any of your income and you can’t claim any of your expenses for the holiday home. You can also choose for your rental activity to remain outside the tax system if:aes for holiday homes
you make a loss, and
your gross income from income-earning use is less than 2% of the rateable value of the property.
The above exemptions don’t apply to holiday homes owned by companies.
What income is taxable?
You must pay income tax on rent earned from income earning use. Any rent from private use is exempt from income tax.
What Expenses are deductible?
Expenses from mixed-use holiday homes fall into threecategories:
1. Fully deductible. You can claim 100% of any expense which relates solely to the income-earninguse of the holiday home. Examples: Costs of advertising for tenants, costs of repairing damage caused by tenants.
2. Not deductible. You can’t claim any expenses relating to the private use of the holiday home. Example: Costs of a boat and quad bike stored in a locked garage and unavailable to the non-associated people renting the holiday home.
3. Apportioned. If an expense relates to both income earning use and private use, you need to apportion it using this formula:
Expense × income earning days divided by (income earning days + private use days)
Examples: mortgage interest, rates, insurance, repairs for general wear and tear.
Carry forward of losses
If you make a loss from your mixed-use holiday home, and your gross income from income-earning use is less than 2% of the rateable value of the property, you can’t claim the loss in the current year. You’ll have to carry forward the loss to offset against income from your holiday home in a future tax year.
You kneed to keep records so you can work out your income tax obligations at the end of the tax year. Your records should show: private-use days, income-earning days, the expenses you paid, and the name of each tenant together with their relationship to you and the rent they paid.
Example of calculations required for a mixed-use holiday home
Peter owns a holiday home in Waihi. During the 2013–14 tax year, the home was used by Peter and his family (42 days) and members of the public (80 days). For the rest of the year (243 days), the home was unoccupied. Peter’s uncle wanted to help out with costs, so he paid rent of $3,150. Rental income from members of the public came to $12,000.
Expenses were: Advertising for tenants $,500, General repairs and maintenance $,750, Repairing window (broken by member of the public) $,150, Cleaning septic tank $,400, Insurance (home and contents) $,800, Lawn-mowing contractor $,250, Fishing licences (for the family) $,250, Rates $1,500, Mortgage interest $,800, Total expenses for the year $5,400
Peter’s property is a mixed-use holiday home because it was used for private use and income-earning use and it
was unoccupied for 62 days or more. His gross rental income is $12,000. The $3,150 received from his uncle is exempt from income tax.
Expenses for the home fall into all three categories.
Fully deductible (expenses relate to income-earning use):
Advertising for tenants $,500, Repairing window (broken by member of the public) $,150, total $650
Not deductible (expenses relate to private use):
Fishing licences (for the family) $,250,
Apportioned (expenses relate to both income-earning and private use)
General repairs and maintenance $,750, Cleaning septic tank $,400, Insurance (home and contents) $,800, Lawn-mowing contractor $,250, Rates $1,500, Mortgage interest $,800- total $4500
Peter applies the apportionment formula to the apportioned expenses:
Expense × income-earning daysdivided by (income earning days plus private use days)
= $4,500 × 80/ 80 + 42
This means Peter’s expense claim totals $3,600.82 (the fully deductible expenses of $650.00 plus the
apportioned expenses of $2,950.82).
His taxable income from his property is:
Gross income $ 12,000.00 less Expenses $ 3,600.82 Taxable income $ 8,399.18
Examples of Private Use/ Income Earning Use
In terms of meeting the statutory test, if the holiday house has mixed uses, the ability to deduct expenditure comes down to a case-by-case assessment that weighs all the evidence. Objective evidence is required that the holiday house is genuinely available for rent and that there is a real prospect of occupancy and rental income being earned. This needs to be considered separately in relation to each year (that is, just because a holiday house has been genuinely available for rent and sufficiently marketed and/or actually rented in one income year, does not mean a deduction will be automatically allowed in subsequent income years).
A holiday house in the Coromandel has earned significant rental income after active marketing at competitive rates in newspapers and on internet sites for almost all of the year. However, the owner's family uses the holiday house for two weeks over the Christmas/New Year period. Even though, in this case, the holiday house may not be actually rented out for every day of the remaining 50 weeks, provided it is available for rent during those 50 weeks, it is generally possible to deduct expenses for that period (ie, for 50 weeks out of the full year). Any expenses that are variable in nature (ie incurred when the property is occupied) should be spread on an appropriate basis.
A holiday house in Mount Maunganui is used by its owner and her friends and family for most of the year. However, the holiday house is rented out to a third party for two weeks over the Christmas/New Year period for $3,000. In this case, the owner may deduct expenses (eg, interest charges, depreciation costs, insurance, and rates) for the proportion of the year that the holiday house was actually rented out (ie, for two weeks out of 52 weeks). Any expenses that are variable in nature (ie incurred when the property is occupied) should be spread on an appropriate basis.
A holiday house in Queenstown is available to be rented for eight weeks a year when it is not being used by the owner. For four of those weeks it is rented to members of the public for its market rental of $600 per week. For the remaining four weeks it is rented out to a family friend. The friend is charged "mates rates" of $350 per week. In this case, IRD would accept the owner deducting expenses (eg, interest charges, depreciation costs, insurance, and rates) for the proportion of the year that the holiday house was rented to the friend (ie, for four weeks out of 52 weeks) up to a maximum of $1400 (the amount of rent received). Full deductibility would be allowed for the remaining four weeks that the property is rented out.
A holiday house in Papamoa is used by the owner for most of the year. A market rental for the property would be approximately $450 per week. The holiday house is made available for use by a family friend for three weeks during summer. The friend is not charged for staying at the property, but chooses to make a contribution of $200 to the owner towards the cost of power, water, etc for the three weeks. In this case, the amount received is not income of the owner and, consequently, does not need to be returned to IIRD (nor would any tax return need to be filed - unless the owner otherwise had to file one). Similarly, no deductions are available to the owner.
BUYING AT MORTGAGEE SALE- THINGS TO BE AWARE OF
You have choices when you buy, including buying property which is a mortgagee sale. What is the difference between a mortgagee sale and a nomal sale of property? What are the things to look out for if you buy at mortgagee sale? As the sale is being undertaken by the owner's bank or finance company there are some potential issues that mean you need to take more care than you would in a normal property transaction.
A lender owes certain duties to the home owner when exercising its power of sale. There is a general duty to obtain the best price reasonably obtainable at the time of the sale. This includes advertising the property correctly and undertaking adequate marketing. However, although this duty of care is owed to the owner, the protections available to a buyer in a mortgagee sale are more limited.
When buying a property in a mortgagee sale, you should check whether the agreement for sale and purchase is conditional on the mortgagor failing to repay his or her debt by a certain date. Even in an "unconditional" agreement for sale and purchase, there may be a clause allowing the mortgagee to cancel the agreement if the mortgagor discharges the debt, or brings a legal action to stop the sale from going ahead. This means in some cases you will not be certain that the sale will go ahead until the actual settlement date.
It is also important to check who the agreement for sale and purchase is with. From the time the lender gains the right to exercise its power of sale, the owner is not able to sell the property without the lender's consent. It is therefore unwise to enter into an agreement for sale and purchase with an owner without checking that the bank has consented.
An agreement for sale and purchase in a mortgagee sale is usually different from the standard contract in other property deals. The lender will require removal of some of the more common contractual provisions. As the lender wishes to dispose of the property as soon as possible, it may be unwilling to negotiate the terms of the agreement, or allow the purchaser to make it conditional. It may be difficult to make the agreement subject to finance or a builder's report, which means that you need to arrange finance and be satisfied as to the condition of the property before entering into the agreement.
Another potential pitfall is that a lender's agreement for sale and purchase will not usually guarantee vacant possession. You should find out whether the mortgagor is still occupying the property, or whether there are existing tenants. If this is the case, it may become your responsibility to make the previous occupiers vacate the property after settlement.
Furthermore, there is usually no vendor's guarantee for the condition of the property, including compliance with the building code. If you are able to inspect the property before the sale, it will not necessarily be in the same condition on the settlement date. The owner has the right to remove any chattels that would usually be included in a sale and purchase agreement.
You as the purchaser must bear the risks for any defects or damage to the property, so it may be a good idea to adjust your offer to take this into account.
You should also insure the property as soon as the agreement for sale and purchase is signed, so that you are not out of pocket in the event of damage to the property.
Given the numerous potential issues associated with buying a property at a mortgagee sale, it is important to do your homework before signing an agreement for sale and purchase. Find out as much as you can about the property, read the agreement carefully, and discuss the proposed purchase with your solicitor.
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