Rental income is taxable in New Zealand, making it essential for property owners to understand their tax obligations. The Inland Revenue Department (IRD) requires that rental income is reported annually, and property owners can claim certain expenses to reduce their taxable income. Here’s a guide to help you navigate New Zealand's tax requirements for rental income.
What Qualifies as Rental Income?
Rental income encompasses earnings from letting a residential property, whether it's a house, apartment, or room within your own home. This includes:
- Short-term rentals, such as Airbnb.
- Long-term arrangements, including boarders and flatmates.
- Money received for property use, including withheld bond amounts for damage.
The IRD considers all these earnings as rental income.
Declaring Rental Income to the IRD
All landlords must declare their rental income, whether the property is rented out full-time or part of the year. Key points include:
- Rental income must be declared on the annual IR3 tax return.
- Deductible property-related expenses reduce the taxable portion of rental income.
- Maintaining thorough records of income and expenses simplifies filing and ensures accurate tax reporting.
Allowable Deductions for Rental Property Expenses
To determine the tax owed on rental income, landlords can deduct certain allowable expenses from their gross rental income:
- Rates and Insurance: Fully deductible operational costs.
- Mortgage Interest: Starting April 2024, landlords can claim 80% of interest on loans for rental properties.
- Property Management Fees: Deductible, including legal fees for tenancy agreements.
- Repairs and Maintenance: Routine repairs are deductible, but capital improvements are not.
- Depreciation on Assets: Claimable for fittings and fixtures, though building depreciation is no longer deductible.
Tax Rates on Rental Income
Rental income is taxed alongside other income sources, using New Zealand’s standard income tax brackets:
- 10.5%: Income up to $14,000
- 17.5%: Income from $14,001 to $48,000
- 30%: Income from $48,001 to $70,000
- 33%: Income from $70,001 to $180,000
- 39%: Income over $180,000
Rental income is combined with other earnings, such as salary or investments, and reported in your IR3 tax return.
Tax Implications for Vacant Properties
Expenses incurred during vacant periods may still be deductible if the property is available for rent. Examples include:
- Depreciation on assets.
- Routine operational expenses.
However, capital improvements during vacancy are not deductible.
GST and Rental Income
- Residential Rentals: Exempt from GST. Landlords cannot charge GST on rent or claim GST on related expenses.
- Short-Term Rentals: GST applies if annual turnover exceeds $60,000, making landlords eligible to claim GST on related expenses.
For more information, consult IRD's guide on GST for short-term rentals.
Bright-Line Test and Capital Gains Tax
The "bright-line test" applies to profits from property sales within specific periods after purchase. Key details:
- Current Periods: Ten years for existing properties, five years for new builds.
- From July 1, 2024: The bright-line period reduces to two years.
- Profits from property sales within two years are subject to income tax (IRD Bright-Line Test).
Managing Your Tax Obligations on Rental Income
Paying tax on rental income is integral to being a landlord. Steps to ensure compliance:
- Track Expenses Accurately: Maintain detailed records of all income and deductible expenses.
- Consult Professionals: Seek advice from tax professionals to navigate evolving regulations, such as the bright-line test and interest deductibility changes.
Planning ahead and understanding your tax obligations will help prevent unexpected bills and ensure the financial sustainability of your rental investment.