Zip It

Who needs to talk to their accountant and solicitor, they only ever send you a bill.

With the market looking up we are seeing the banks start to talk to their clients and offer great deals to ease the pain of making payments or offering mortgage top ups.

The latest property sales information shows some areas ofAuckland have gone up 12% compared to last year. Furthermore, Christchurch is up 9.4% on last year. More importantly,Wellingtonis up 2% on last year. This is all very exciting stuff to the banks and anyone with an investmentproperty to sell.

But, you are not looking to sell are you? What this means for most people, is they are probably looking to lock in their interest rate if they haven’t done so already.Unfortunately after going to the bank and demanding the best rate, you get it. The lending specialist is coming back with some very attractive offers to refinance loans and free up some debt on your own home while locking you in at a nice low fixed rate of 5.5%. No sooner have they given the pile of loan documents to you, you sign them without even reading the notes about seeking independent tax and legal advice.

9 months later, you take your information to your accountant feeling ever so smug the interest on your rental property is higher and you will get a bigger deduction this year for the rental losses. But just like always the accountant has to break the bad news to you. Not that you have committed yourself to an 18 year sentence called parenthood. Worse, all those extra interest deductions you thought you could get are non-deductible. To add insult to injury, you cannot even pay down your private mortgage while leaving the investment property interest only, as it’s all tied together.

We are only 2 months into the financial year and I have come acrossthis case a number of times already. Sure, the finer points change, like it might have just been a mortgagetop up to do some homeimprovements. However, thefundamentalsare the same for the 10 minute phone conversation even IF it cost you a couple of hundred now, it could save thousands by the end of next year.

Keeping it in the family

I had a dear friend mention to me the other day that they were downgrading and moving into a 2 bedroom flat. Their eldest has been at home for the past 5 years or so making use of the larger house. Since he moved in he has helped to pay the mortgage (since they are retired the purse strings are a little tighter).
Just off hand I asked how they were going about it. "The solicitors drafting up the sale and purchase agreement and the bank is all happybecausethey can see he has been paying the mortgage as it is for the past few years anyway".

Now I'm curious, this kid will be paying a $400,000 Mortgage, I knew he was doing well for himself but I thought it might have been a little out of his price range for a first home. So Itentativelyasked how much they were selling the property for. $240,000. With this I was dumb founded, I knew the answer and let’s just say it was a little less diplomatic than this but. "What genius lawyer is doing up the sale agreement for $240,000 your house is worth twice thatisn'tit?". After a few more drinks and a good nights rest, we meet up thefollowingday for a real meeting.

True enough turns out the property was only worth around $360,000. One quick call to the lawyer and they agreed they thought it strange but were "just doing as the client and the sons accountant asked". A call to the Son's accountant, we came to the following agreements. a) Property transfers between related parties must be at armslengthi.e sold at market value. b) the transfer is still do-able if the parents agree to do gifting over the next 5 years (if they live that long). But wait then they get the thought mum and dad can just gift it all in a lump sum. Great, so they are downsizing now andlikelyto be in a home within the next 5 years but lets ignore the residential care subsidy for the parentsbecausethe sons accountant thinks this is ok. As I'm sure you canappreciatepropertyand related party transactions are a nice complex topic that will never fit here so I will leave you with the simple advice for the month.

If you plan on making any changes please seek INDEPENDENT tax and legal advice. Depending on your agreement, this may be covered as part of yourexistingservice arrangement, it may not, but you can ask that much for free can't you?


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Keep an eye out for July’s article!


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