This post answers some common questions regarding tax and rental properties.
The bright line rule came into effect on 1 October 2015 and states that if a rental property was purchased after 1 October 2015 and sold within 2 years of the purchase date, the gain would be treated as income. The main exemption is if the property was your family home.
From 29 March 2018, the Bright Line Rule was amended to 5 years. Any property acquired from 29 April 2018, will be subject to the five year rule: ths means if you have acquired a residential property since 29 March 2018 and dispose of it within five years of acquisition, any gains will be subject to income tax. Again the main exemption is if the property was your family home or you inherited the property.
The expenses you can deduct must relate directly to the rental property. Such examples could include rates, insurance, body corporate expenses, repairs and maintenance, letting fees, interest on loans, accounting fees and phone expenses.
If you have provide chattels such as curtains, washing machines or dishwashers in your rental properties, you can claim depreciation on these chattels. The depreciation rate is found on the IRD’s depreciation rate finder.
Regarding home office expenses, IRD requires you to be reasonable. If you only have 1 rental property bringing in $30,000 per annum and are deducting $20,000 of home office expenses, IRD may consider this unreasonable and may either issue a re-assessment or require an explanation.
Renting out residential dwellings is a GST exempt activity. This means GST can’t be charged on the rent for a residential dwelling. Similarly, you can’t claim the GST on expenses that relate to renting out residential dwellings even if you are GST registered.
If you rent out commercial properties and are GST registered, then you can claim the GST on expenses that relate to renting out the commercial properties such as property management expenses, insurance, rates, repairs and maintenance. However, you need to pay GST on your rents. In most cases, the GST component on your rental income is larger than the GST component on your expenses, so you will end up paying GST to IRD.
Interest expenses on your loan is GST exempt and bank fees are GST exempt.
IRD has released an issues paper proposing to ring-fence or restricting the ability to offset rental property losses against other sources of income.
The rules are aimed at levelling the playing field between property speculators/investors and home buyers.
Currently investors who make a rental property loss (rents being less than the deductible expenses) are able to offset their loss against other sources of income to reduce tax on other income.
Some have claimed this is unfair and want to ring-fence this loss so that the loss can only be offset against future rental income.
In other words, The proposed loss ring-fencing rules will mean that speculators and investors with residential properties will no longer be able to offset tax losses from those properties against their other income (for example, salary or wages, or business income), to reduce their tax liability. The losses can be used in future years, when the properties are making profits, or if the person is taxed on the sale of land.
The ring fencing of rental losses has not been enacted into law yet and is currently in the consultation phase.