Rental Property in Auckland - Time to sell?

[David Hardman]

Hey guys

I'm living in Sydney but own a rental property in Auckland (Takapuna)

I bought the property about 5 years ago for $NZD265,000. I've been told in todays market I could get $NZD500,000 for it.

Its been rented out solidly over the last 5 years and has given me no problems whatsoever. The house is in good nick and needs no money spent on it.

The rental income pays the bulk of the mortgage (200k left outstanding), insurance, rates however I normally have to subsidies by around $1500 PA

My mortgage rate is currently fixed at 7.3% but comes off this rate in Feb. ASB floating rate is currently 9.5%. I could fix for a further 2 years at 8.3%

Many are picking we are at the end of the interest rate rises and because of this the NZD may weaken over the next year or so.

Here is an interesting article

http://www.nzherald.co.nz/section/story.cfm?c_id=3&ObjectID=10362292

I have made a nice capital gain based on the Auckland house prices boom and also the kiwi strengthening. When I bought the house the AUD/NZD cross rate was around 1.30.. its now around 1.09.. so I've done quite well on the currency front as well....

With house prices peaking (???) and the NZ dollar possibly weakening (???) maybe now is the right time to sell.


???

[David Hardman]

Further to this.

If I did sell the proceeds would make a significant dent in my "owner occupied" mortgage on my house in Sydney.

I guess this would be advantageous as this debt is non deductible.

[shasta]

Locking in the gains & reducing interest bearing personal debt probably best position to be in for 2006 with all the doom & gloom predicted ahead.

You can always use the equity to start over again when the dust has settled.

Quiet a few investors on this forum are seemingly overweight in cash at the moment & biding there time.

[David Hardman]

Another option would be for me to get a formal valuation on the house.

Lets assume this comes in at 500k

Refinance NZ mortgage and withdraw equity (around 250k) leaving 50k deposit (10%) in the rental property

Use money to pay of Sydney house mortgage.

This would reduce my non deductable debt and increase my deductable interest payments which can be offset against my other income. I would also avoid a CGT event.

Thoughts?

[shasta]

Not a bad idea, but you would need to get a good interest rate to do this & ours are pretty high.

Floating or fixed or a mixture?

The timing of all this is crucial!

[minimoke]

quote:Originally posted by David Hardman
Refinance NZ mortgage and withdraw equity (around 250k) leaving 50k deposit (10%) in the rental property

Use money to pay of Sydney house mortgage.

This would reduce my non deductable debt and increase my deductable interest payments which can be offset against my other income. I would also avoid a CGT event.

Thoughts?

I think you will find that you will only be able to claim the original amount of interest as a taxable expense as this is a genuine cost associated with your rental. The top up would not be related to the rental property so is probably not claimable

[steve fleming]

if you do intend to return to NZ, then you may want to hold off selling your rental until you re-qualify as a NZ tax "resident", to avoid paying ATO CGT of up to $100k

[David Hardman]

quote:Originally posted by steve fleming

if you do intend to return to NZ, then you may want to hold off selling your rental until you re-qualify as a NZ tax "resident", to avoid paying ATO CGT of up to $100k


Yeah i've thought about this as well but family/work commitments makes it hard to leave Sydney.

Any idea on how long it takes to re-qualify for NZ tax residence. If I did move back it would only be temporary (but the IRD/ATO needn't know this)

I think I could only handle Auckland for a year at the most ;)

[shasta]

check out www.ird.govt.nz & the publications section for non residents, i think its 180 days, but having investments & family here would help

[steve fleming]

quote:Originally posted by David Hardman




Yeah i've thought about this as well but family/work commitments makes it hard to leave Sydney.



yeah...know what you mean!


quote:Originally posted by David Hardman




Any idea on how long it takes to re-qualify for NZ tax residence. If I did move back it would only be temporary (but the IRD/ATO needn't know this)

I think I could only handle Auckland for a year at the most ;)




Shasta is correct.... generally 180 days, although there is no hard and fast rule - you have to prove that you intend to committ long term to the country you reside in...be careful though in this regard, as it the ATO/IRD do pursue you if they think your residency is a "sham"!

[Halebop]

I think there could easily be a 10% differential (in Australia's favour) in $A/$NZ cross rate over the next couple of years. But your transaction costs are likely to swallow a degree of this.

Property would certainly seem to be at a peak and it appears unlikely the the boom time increases can continue. On the positive though employment is still strong, as is net immigration into Auckland, albeit on a more modest scale. Interest rate expectations have certainly cooled, with expectations on a likely Neutral or dropping rate environment. However, this if anything would only likely prod the RBNZ into further hawkish acts so some caution would be prudent here.

If cashflow and debt levels are not concerning but you wish to pursue alternate investments in Australia then refinancing and transferring the additional cash to fund an Australian investment (rather than personal consumption debt like a "owner occupied" mortgage) may be viable. NZ borrowing costs are likely to be solid comparative to Australia's so cashflow would have to be a major consideration.

With the right structure, (at least) refinancing your original equity out of the property should be tax beneficial.

Comparing apples with apples, on balance shifting from end of cycle New Zealand real estate, paying off Australian personal consumption mortgage debt and eventually refinancing into end of down cycle Australian real estate might be lower risk, tax efficient and more profitable, but incurs additional transaction costs and closes you to any further gains in NZ assets prices or currency.

[CJ]

quote:
quote:Originally posted by David Hardman




Any idea on how long it takes to re-qualify for NZ tax residence. If I did move back it would only be temporary (but the IRD/ATO needn't know this)

I think I could only handle Auckland for a year at the most ;)




Shasta is correct.... generally 180 days, although there is no hard and fast rule - you have to prove that you intend to commit long term to the country you reside in...be careful though in this regard, as it the ATO/IRD do pursue you if they think your residency is a "sham"!


The issue is not so much a "sham" but that you will gain NZ residency (through the 180 day test) but not lose your Australian residency, hence ending up a dual resident which complicates things. You normally need to sever all ties and plan to leave for at least 2 years but preferably 3 years.

[CJ]

quote:Originally posted by aspex

Question on Australian residency tax considerations.
If the person is the beneficiary of a NZ family trust, what changes in the structure of ownership of assets owned by the trust, would be reflected in that individual,s Australian tax position?
I cannot see that there would be any, provided the Australian resident did not receive a payout while living in Australia, while on taking up residency in NZ the money could be distributed.


For an NZ qualifing trust, the key person is the settlor and there residence. htere must always be one NZ resident settlor of or the trust will lose its qualifying status.

In relation to the distribution, that will depend on the tax laws of the nation you are resident in. If an income distribuion, it will be taxed as income. If a capital distribuiton, not sure as NZ not taxed on these but Australia may. The resience of the trust is not effected by the residence of the benificiary.

[Westie]

Sell the house into an LAQC, take the take the money you need to pay off your personal mortgage, leave the remainder in the rental. Talk to your accountant. An LAQC can have non resident shareholders but you may have to file audited accounts. You will also probably have depreciation recovered. Do the math, even with the negative gearing on the NZ rental you will probably come out ahead due to tax deductibility on the rental & savings on the interest costs on your personal debt which probably has an effective rate of at least 11% after taking into account your tax bracket.

I've thought a lot about selling my rental properties but in the end, unless you really need the money, you will probably do yourself a disservice in the long term. Takapuna is a desirable area. Last I heard they weren't creating any more land in Takapuna so you have the law of supply & demand on your side. Forget about trying to predict what will happen in the next couple of years. Think clearly about the long term. If you think you can come back in 5-10 years and buy the same property for the same or less, sure, sell it. Otherwise, just sit on it.