When you own a residential rental property, the tax you pay depends on whether you are an investor or dealer in residential rental property as dealers are taxed more heavily.
Rental property investors generate ongoing rental income, without any firm intent of resale, while property dealers/speculators buy property intending to sell it and have established a regular pattern of buying and selling property.
In this article we focus on the first category – rental property investors.
Rental income and paying tax
If you're charging rent, you may need to pay tax on the rental income you earn in the same year you receive it. Your rental income could be from a house, land, caravan, sleep-out, building, holiday home or room in your own home.
1. Residential rental property
- Generally, the payments you get for renting out property are income.
- You can deduct rental expenses from the total rental income you earn in the year.
- You need to complete an annual tax return.
- You must keep records of income and expenses for 7 years.
- Tenancy Bond Centre payments you receive for things such as damages and rent arrears are rental income.
Residential property expense deductions
If you have rental property that is not used privately at all, you can deduct expenses from the rental income you include in your tax return. Not all rental expenses can be deducted.
Expenses you can deduct from your rental income are:
- Cost of insuring your rental property
- Rates for the property
- Payments to agents who collect rent, maintain your rental, or find tenants for you
- Fees paid to an accountant for managing accounts, preparing tax returns and advice.
- Repairs and maintenance costs
- Fees for arranging a mortgage to finance the rental property
- Fees for drawing up a tenancy agreement
- Cost of getting a valuation required to get a mortgage, but not insurance valuations
- Costs of taking legal action to recover unpaid rent
- Costs for evicting a tenant
- Mortgage repayment insurance
- Depreciation on capital expenses
- Travel expenses for travelling to inspect your property or to do repairs
- Legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
You can also deduct interest on money you have borrowed to buy your rental property. You cannot deduct this if you have used some of the money:
- For something else
- To top up the mortgage for another purpose.
Expenses you cannot deduct from your rental income are:
- Capital expenses
- Purchase price of a rental property
- Principal portion of mortgage repayments
- Costs of making any additions or improvements to the property
- Cost of repairing or replacing damaged property, if the work increases property value
- Real estate agent fees charged as part of buying or selling the property
- Depreciation on the rental's land or buildings
- Your time when you do repairs and maintenance work
- Legal fees involved with selling the rental property (unless you're in the business of providing residential rental accommodation).
The difference between repairs and improvements can be complex. If you are unsure about whether work done on your property is repairs or improvements, please contact us for further advice.
2. Renting out a holiday home
There are different rules if you rent out a holiday home, depending on your situation.
If you have a holiday home that you rent out, use privately and it is unoccupied for 62 days or more the mixed-use asset rules apply.
If the mixed-use asset rules apply, you can choose not to declare rental income from the property if the rental income is:
- Less than $4,000 a year
- Less than 2% of the holiday home's value and you make a loss from the rental activity because your deductible expenses are more than the income.
If you choose not to declare the rental income you will not be able to claim expenses for the holiday home.
If the mixed-use asset rules do not apply, you must declare all rental income from your holiday home. Rental expenses can be deducted from this income. Some expenses may be fully deductible. If you use the holiday home privately, some expenses will only be partly deductible.
3. Jointly owned rental properties
If you own rental property in partnership with one person or more, you may need:
- A shared set of rental records
- To file an IR7 partnership income tax return.
All joint owners will also need to file an IR3 tax return for their share of the rental income with the IRD.
4. Renting out your house or a room
Payments you get from people renting your home or a room are taxable. This includes payments from:
- People renting through websites such as Airbnb or Bookabach
- One-off or irregular rentals.
If you provide this type of short-stay accommodation, you may have different options for working out your tax:
- Standard cost option, or
- Actual cost option.
If you use the standard cost option, there are set amounts you can claim as deductions. You only need to declare the rental income in excess of the set amounts.
If you use the actual cost option, you must declare all the rental income. The deductions you can claim are based on your actual costs, apportioned based on floor area and number of rental nights.
GST and residential rent
GST is not charged on residential rent. This means you do not include residential rental income in your GST return even if you're registered for GST.
When you deduct rental expenses in your tax return - use the GST inclusive amount.
Please contact us to discuss your specific circumstances to ensure you make the most from your residential rental from a tax perspective.