This post answers some common questions regarding tax and rental properties.
Is the bond included as income?
No, the tenancy bond paid to Tenancy Services is not treated as income. However, at the end of the tenancy, if the bond is used to pay for unpaid rent or damages, then this amount should be included as income.
For instance, say your tenant, Jane & family pays a bond of four weeks rent totalling $2400 (4 weeks rent x $600 weekly rent). At the end of the tenancy, there is one week’s unpaid rent which Jane requested to be deducted from the bond. Also, there are some damages caused by Jane’s child which costs $100 to fix. Jane has requested that the damages be deducted from the bond. When the bond refund form is completed, section four will look like …
You as the landlord (owner) will include the $700 as income.
What expenses can I deduct from the rental income?
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.
If I am registered for GST, can I claim the GST on my expenses?
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.
Is there tax to pay if I sold my rental property for a profit?
The bright–line rule only applies to residential properties bought on or after 1 October 2015. Under this rule you’ll pay tax on any profit you earn if you buy and sell a house within two years.
If you bought the rental property before 1 October 2015, then you may still have tax to pay. If you bought the property as an investment and not as a property trader. then you won’t have capital gains tax to pay. However, if you had previously claimed depreciation expense (prior to 2011), then you will have to add up all the depreciation expense you claimed in your previous tax returns. The total depreciation expense you claimed would be treated as income and you would have to pay tax on it. This is known as depreciation recovery.
For example, if you bought a property on 1 April 2010 for $600,000 (land value $400,000 and building value of $200,000). The depreciation rate for buildings was 2% straight line in 2010. So for the income year from 1 April 2010 to 31 March 2011, the depreciation claimed would be $200,000 x 2/100 = $4000.
From 1 April 2011, you could not claim depreciation as an expense.
On 1 April 2016, if you sold the property for $1 million, you have to include as income the depreciation recovery of $4000 in your income tax return.
From 1 April 2011 onwards, the depreciation rate for buildings with estimated useful life more than 50 years is 0%. So you can no longer claim depreciation on your rental residential dwellings.
What is the bright line rule for residential 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.
The bright-line rule only applies to residential property. A property isn’t residential if it’s mainly used for business or as farmland.
That means if you sell farmland or business property, the bright-line rule won’t apply but you’ll still need to follow existing tax rules.