Jul 25

Residential Rental Income

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
  • TaxSnaps Subscription
  • 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

Expenditure to meet Healthy Homes standards:
Owners of residential rental properties are required to make sure their properties meet certain minimum standards.
The 2019 Healthy Homes regulations apply progressively when there are changes in tenancies after 1 July 2021 with universal application from 1 July 2024.
Costs incurred in meeting the standards will be capital in nature and not deductible if the work:
• results in the reconstruction, replacement or renewal of the whole asset or substantially the whole asset, or
• goes over and above making good wear and tear (that is, it is not a repair) and changes the character of the asset.
Costs incurred in meeting the standards will be revenue in nature and deductible if work to repair or maintain an asset is completed without reconstructing, replacing or renewing the whole asset, or substantially the whole asset, or without changing its character

 * Note: Interest Deductibility and key changes from 2024:

From 1 April 2024, you can claim 80% of the interest incurred for funds borrowed for residential property. This is regardless of when the property was acquired or when the loan was drawn down.

From 1 April 2025 interest deductibility will be fully restored, and you will be able to claim 100% of the interest incurred.

What is not changing:

The following will remain unchanged until interest deductions are fully restored:

  • property types the rules apply to
  • how the rules work for different entities
  • the land business, property development and new build land exemptions

Interest deductions that were previously disallowed between 1 October 2021 and 31 March 2024 will remain disallowed unless the property is sold and subject to tax.

When property is sold:

The rules for disallowed interest deductions when a property is sold are remaining. This means, if the sale of a property is taxable under the bright-line property rule or 1 of the other land sale rules, the amount of the previously disallowed interest can be treated as if it were part of the cost of the property in the year you sell it.