Owning rental property in New Zealand comes with many financial responsibilities, and understanding what tax deductions you can claim is crucial to managing your investment efficiently. Here’s a detailed guide to help rental property owners understand which expenses are deductible and which are not.
What You Can Claim:
1. Interest on Loans:
Interest charged on loans used to purchase or improve a rental property is deductible. However, be mindful that from October 2021, changes were introduced to limit deductions for interest on residential rental properties. Always check for any specific exemptions that may apply.
2. Repairs and Maintenance:
Expenses related to fixing wear and tear or damage (e.g., repairing a broken window, replacing a part of a fence) are deductible. However, it is essential to distinguish between repairs and capital improvements—improvements that increase the value of the property are not deductible.
3. Property Management Fees:
If you use a property manager, the fees for their services are fully deductible. This includes tenant finding, inspections, and rent collection.
4. Rates and Insurance:
Both council rates and insurance premiums (such as for rental property or landlord insurance) are allowable deductions.
5. Depreciation of Chattels:
While you can’t depreciate the land or buildings themselves, you can depreciate the assets within the property, such as appliances, furniture, and other fittings. Make sure to keep an accurate inventory.
6. Legal Fees:
Legal expenses that are directly related to generating rental income, such as lease preparation, can be claimed. However, legal fees for buying the property are capital expenses and therefore non-deductible.
7. Accounting Fees:
If you use an accountant to manage your rental income and expenses, their fees are deductible.
8. Travel Expenses:
Travel expenses incurred for property inspections, repairs, or collecting rent are deductible. However, ensure you keep accurate mileage records or receipts for any relevant travel.
What You Can’t Claim:
1. Capital Improvements:
Any expenses that add to or improve the property (e.g., building a new room, replacing the entire roof) are capital and therefore non-deductible. These costs, however, can be depreciated for capital gains tax purposes when selling the property.
2. Private Expenses:
Personal costs, such as commuting to the property from your home for non-business reasons or personal use of the property (holiday home), cannot be deducted.
3. Initial Purchase Costs:
Costs related to purchasing the property (e.g., legal fees, stamp duty) are not deductible, as they are considered capital expenses.
4. Fines and Penalties:
Any fines or penalties incurred, such as from breaches of tenancy laws, cannot be claimed as deductions.
5. Loan Principal Repayments:
While the interest on your mortgage is deductible, the principal repayments are not.
Final Tips for Rental Property Owners:
Keep Detailed Records:Accurate record-keeping is key. Keep all receipts, invoices, and documentation to substantiate your claims.
Use a Professional Accountant:A tax advisor can help you navigate complex rules and ensure you maximise your deductions while staying compliant with the law.
Conclusion:
Understanding what you can and can’t claim as a rental property owner in New Zealand is essential for managing your investment’s tax obligations. By claiming allowable expenses, you can reduce your tax burden and ensure that your property remains a profitable venture.