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Managing the income tax on your rental property

4 min read

If you’re planning to buy your first home, property prices where you live and work may make getting onto the property ladder somewhat difficult. One solution is to purchase a rental property located in another part of town or even the country. If you take this route, the IRD will consider the rent you receive as income, and you will be required to manage it in specific ways. In this article we look at what constitutes taxable income, and what is and isn’t a tax deductible expense.

Taxable rental income

Any rent you receive is taxable in the year you receive it. However, you don’t pay tax on the bond that you forward to the Ministry of Business, Innovation and Employment.

What expenses can you deduct from rental income?

Your property must be tenanted or at least available to rent for you to be able to claim expenses. As a first-home buyer, if you play your cards right, you can considerably reduce your tax burden by claiming rental-related costs.

Any expenses you claim must be directly related to your rental property: rates, insurance, and property management fees and commissions, for example.

Other expenses you can claim include:

  • Repairs and maintenance: The cost of redecorating or fixing broken fittings to maintain the condition of your property is tax deductible. If you carry out the work yourself, you can claim the cost of materials, but not your time.
  • Interest rates: You can claim interest on money used to finance the rental.
  • Motor vehicle expenses: If you use your car when managing your rental property for inspections etc., you can claim some of the running costs, which include petrol, insurance, and maintenance. There are two options for claiming vehicle expenses:
  1. Use IRD mileage rates: These are based on the average cost of running your type of vehicle. You will need to keep a logbook and record the date and distance travelled for each trip.
  2. Claim a percentage of total running costs: Again, you will need to record your rental-related travel in a logbook. At the end of the year, you then add up all your mileage and work out a percentage compared to personal vehicle use. Alternatively, every three years, you can record your activity over a three-month period.
  • Travel expenses: If you need to travel out of town to carry out maintenance or a property inspection, you can also claim costs such as airfares, rental car hire, and accommodation. If your travel involves mixing business with pleasure, make sure you only claim the costs directly associated with your rental.
  • Fees: You can claim fees for services such as drawing up a tenancy agreement, hiring an accountant, getting a valuation to obtain a mortgage — even evicting a tenant.
  • Depreciation: Finally, you can claim for the wear and tear on fixtures and fittings you buy for your property such as carpet, blinds, furniture, and hot water systems.  Depreciation cannot however be claimed for wear and tear on the house itself.

Tip: Your accountant can't legally estimate the value of a property or its fixtures, so get a tax-depreciation schedule, which is 100% tax deductible, from a quantity surveyor.

Expenses you can't deduct from rental income

A capital expense is defined as the cost of buying an asset or improving its value. You can't claim this type of expense from your rental income.

So, what are capital expenses? Here are some examples:

  • Your rental’s purchase price
  • The capital portion of your mortgage payments — you can only claim the interest
  • The cost of renovations or repairs to make improvements that will increase your property’s value
  • Real estate fees when buying or selling the property

Ordinarily, you can’t claim a deduction for legal expenses incurred in buying or selling a rental property, as these are capital expenses. However, where your total legal fees for the year are $10,000 or less, you can claim a deduction for legal expenses involved in buying a rental property.

Keep good records

To ensure you know what your income and expenses are, it pays to keep good records. And, you must hold on to them for seven years — even if you stop renting out your property.

The IRD website has a calculator which can help you work out the tax on your taxable income.

Items to keep include:

  • A record of all receipts and payments
  • Cheque butts, deposit books, and bank statements
  • Invoices and receipts
  • The rental agreement and rent book
  • The loan agreement

Tip: To make life easier, you can hire a property management company and have them pay all expenses from the rent they receive for you. At the end of the tax year, you’ll get a summary, which you can give to your accountant, of all the rent received and expenses paid. 

When it comes to your tax obligations, ignorance isn’t an excuse. So, if you have any questions about the rules get in touch with the IRD or speak to your accountant.