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Landlord 101: Knowing How Tax Works When You Own a Rental

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It’s essential to know the tax rules when you own a rental property in Northland.

The experts at Rentals.co deal with these questions daily and are always available to help when you want to know the basics of how tax works regarding rental investment properties. They can also set you up with expert accounting services.

The Inland Revenue Department offers a 40-page booklet on the topic (click here to read and download), but the following are the basics of tax rules around rental properties.

The first tax question is whether you are a residential rental investor or a speculator/dealer in residential rental properties, as dealers are taxed more heavily.

Rental property investors who generate ongoing rental income, without any firm intent of resale, pay income tax on their net rental income but generally not on the sale proceeds of the property.

Property dealers/speculators, on the other hand, who buy a property intending to sell it, have established a regular pattern of buying and selling property and must pay income tax on any gain they make from re-selling. Speculators / dealers must also pay tax on rental income; GST may be applied.

Paying tax on your rental income

  • Any income received from a rental property will be liable for income tax and must be included on your tax return.
  • If you receive rent in advance, it is taxable in the year in which you receive it.
  • Amounts received for tenancy bond and passed on to the Tenancy Bond Centre are not income, (though money received from the Bond Centre for payment of damages or rent arrears should be included as income).

Expenses deductible from your rental income include:

  • Mortgage repayment insurance
  • Accounting fees for the preparation of accounts for your Northland rental property taxes
  • Rates and insurance
  • Depreciation (but not building depreciation).
  • Interest paid on money borrowed to finance your property
  • Fees or commission paid to agents who collect the rent, maintain your rental, or find tenants for you
  • Repairs and maintenance (except if they substantially improve the property)
  • Motor vehicle and travel expenses

Expenses you can’t deduct from your rental income in your tax return:

  • Costs of repairing or replacing any damaged part of the property, if the work increases the property’s value
  • Real estate agent fees
  • Purchase price of the property
  • The capital portion of mortgage repayments
  • The costs of making any additions or improvements to the property

Different tax rules for holiday homes

As the Inland Revenue Department explains, if your holiday home is rented to the public for short-term stays, you need to be aware of “mixed-use” asset tax rules and exemptions, and how private use differs from income-earning use. There are also rules (which could save you money!) around staying at the property for repair work, and rules if you earn less than $4000 from rental in a year on the property.

Sources:

https://www.business.govt.nz/compliance-matters/tax-and-levies/paying-tax-and-acc-levies/tax-for-rental-properties/

https://www.ird.govt.nz/resources/d/2/d2070386-3cd6-4c11-ac12-66422d5af404/ir264.pdf