Investment property tax tips - common mistakes

As a landlord you have certain tax obligations each year. You need to keep records, declare the rental income you earn and complete annual tax returns.

Investment property business is a numbers game. It can be hard to navigate around costs, taxes, deductions especially if it’s your first year renting out a property. It is probably a good idea to have a tax accountant assist you at year end. But here are some common mistakes that should be avoided:

1. Repairs and Maintenance

Some repairs and maintenance costs can be claimed as tax deductions. But just because you purchased a “doer-upper” and spent $50,000 on repairs to get it up to a reasonable standard to be rented out, doesn’t mean that your expenditure is tax deductible. If work is considered more of an improvement than a repair, then you can’t claim the cost as an expense. If the maintenance works were carried out after the tenants have moved out and before the house sale, even if it was to fix the damage caused by tenants, you are not able to claim these costs as deductions. Also remember, if you’re doing the works yourself, you can only claim the costs of materials used and not your time.

2. Interest

Until recently, you could claim the interest charged on money borrowed to buy your rental property. In March, the Government has released plans to phase out deductibility of interest costs for landlords. Broadly speaking, residential investors impacted by the rule change will be able to claim 75% of their mortgage interest charges against their taxable income from October 1, 2021, 50% during the 2024 tax year, 25% in the tax year after that and then 0% going forward.

But you can only claim the interest that relates directly to your rental. If the funds were (partially) used for another purpose, you can only claim proportion of the interest as a deduction.

There are some exemption to the new interest deductibility rules that you can read about here

3. New insulation laws

Even though insulation became compulsory in July 2016 and you may have been forced to install insulation to continue renting your property, this cost is not necessarily a revenue expense. The IRD have confirmed that any new insulation would still be considered of capital nature (an improvement and not a repair) and therefore not tax deductible. Please note that there are some exceptions to this rule and this expense is analysed on a case-to-case basis. We would recommend for you to talk to your accountant to get advice.

4. Legal fees

You can’t claim legal fees associated with buying or selling the property over $10,000 in any given year. The only exception is if you’re in the business of renting properties. Please contact your tax agent for advice if it applies to you.

5. Depreciation

Even though it’s tempting to claim a full cost of furniture, appliances or other fittings purchased for your rental property in one go, you need to allocate the cost of these purchases over their useful lives. This method is called depreciation. This allowance accounts for wear and tear and general ageing of your purchases.
Please note that since April 2011 you can no longer claim depreciation on buildings.

6. Other exceptions

If the property isn’t rented for the full year, isn’t occupied by tenants, isn’t available to be rented out at any stage during the year, or is only available for rent for part of the year then you can’t claim the full year’s ongoing costs (such as rates, insurance and interest).

To find out more on rental property deductions, please speak to your tax accountant or visit IRD website