Income that you receive from renting out a property is called residential rental income. If you are a landlord you will be liable for income tax and this will need to be included in your tax return.
Expenses you can deduct from your rental income:
- Rates and Insurance
- Interest (on the loan that relates to the rental property). See note below*
- Agents Fees and Commissions
- Repairs and Maintenance (required to bringing it back up to the state as it was bought. Note, work carried out for improvements or alterations that increase the value of the property will generally be capital in nature and must be treated as an asset, not an expense. Refer to fixed assets and depreciation section)
- Motor Vehicle expenses (refer to motor vehicle section)
- Travel Expenses
- Bank Fees
- Mortgage Repayment Insurance
- Professional Fees
- Depreciation (refer to fixed assets and depreciation section)
If the property isn’t rented out for the full year:
- You can claim a deduction for any expenses that you incur while your rental property is either rented out or is available to be rented out
- For example, you own a property which you lived in for the first three months of the year, then you rent it out for the rest of the year. When you work out your rental income for the year, you can only deduct the ongoing costs for the nine months that the property was rented out, that is, 9/12 of the expenses
- If a property isn’t occupied or available for letting for a short time, because of redecorating or other maintenance, the ongoing costs will still be deductible for that period. The redecorating or maintenance costs will also be deductible, as long as the work done doesn’t amount to making capital improvements (refer to fixed assets and depreciation section)
Paying Income Tax:
- As an individual property owner, or as a partner in a partnership, you need to file an IR 3 income tax return with the IRD each year
- If your net rent (income less expenses) is a profit, you add this to any other income you have earned. If your net rent is a loss you deduct this from any other income you have earned
- Most people will have a tax year that ends at 31 March each year. If you have any tax to pay (known as residual income tax) for the year, it’s payable either by 7 February of the following year or 7 April if you have a tax agent with an extension of time
- As a general rule, if you’re buying a property with the intention of selling it, you will probably have tax to pay on any profit you make. It’s important that you think carefully about your intentions when you first agree to buy the property, because this will determine your tax situation when you come to sell
GST on Residential Rentals:
- GST doesn’t apply to residential rent, as renting out residential property is exempt from GST. So, you can’t claim GST on expenses you incur for a residential property, and you don’t include GST in the rent you charge. But, when you claim income tax deductions you use the cost of the expense including the GST
* Note: Interest Deductibility and key changes from 2021:
For properties acquired on or after 27 March 2021:
- Legislation has passed that extends the bright-line test from five years to 10 years on residential property
- The Government intends for the bright-line test to remain at five years for new builds and will be consulting on what a new build is soon
- Legislation has passed that introduced a ‘change of use’ rule. If the sale of your property is subject to the bright-line test, and you don’t use a property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value
- The Government has proposed that residential property investors will not be able to offset the costs of the interest they pay on loans to purchase residential property as an expense against their taxable income. A consultation will be held about this, with any law expected to come into effect from 1 October 2021
For properties acquired before 27 March 2021:
- The previous bright-line test for five years will continue to apply for properties acquired before 27 March 2021
- The government has proposed that interest on loans for investment properties acquired before 27 March 2021 can still be claimed as an expense, but the amount will reduce each year until it’s completely phased out by the 2025-2026 tax year. A consultation will be held about this
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