Owning a rental property can be satisfying for those who are financially committed, but it's equally important to consider the tax claims to which landlords are entitled to.
The right claims will not only cut your taxable income but also ensure you don't trip up on rapidly changing tax laws.
This article breaks down the key expenses that landlords in New Zealand can claim, helping you maximise returns from your investment property.
1. Repairs and Maintenance
Landlords can claim expenses associated with maintaining and repairing their rental property. For instance, it may be fixing a leak, replacing an appliance that broke, and general wear and tear. However, one has to distinguish between improvement and repairs. Since repairs and maintenance will, therefore, be deductible, capital improvements, such as the addition of a new room or redeveloping the kitchen into a totally new one, are not available for an immediate deduction.
2. Interest on Loans
Historically, mortgage interest from rental properties was fully deductible. Changes introduced in 2021 reduced deductibility over time for properties purchased before March 27, 2021, mortgage interest tax on properties purchased after that date was not deductible. There were exceptions, including new builds, which remained exempt from this rule.
From 2024, changes by the current government have reinstated partial interest deductibility: 80% of interest will be deductible from April 2024, increasing to 100% by April 2025. This phased reintroduction aims to encourage investment while still addressing affordability concerns.
3. Rates and Insurance
Council rates and property insurance are essential costs for landlords, and both are deductible. This includes landlord insurance, which covers issues like loss of rent or damage caused by tenants. Make sure to keep accurate records of these expenses throughout the year.
4. Property Management Fees
If you engage our property managers to deal with the tenants on your behalf, collect rent from them, and attend to the maintenance of your properties, the charge for the service is fully deductible. Similarly, a fee paid for professional advice, like accounting or legal services, to manage your rental property is also claimable.
5. Depreciation on Assets
Though you are not entitled to claim it on the actual property, you can claim on some of the capital assets, which include appliances, furniture, and heat pumps. For this reason, depreciation deductions have been set aside for landlords in allowing wear and tear on such items over time, which shall reduce the taxable income.
6. Vehicle and Travel Expenses
You can also claim the expenses of travel against your income if you use a car for inspecting the property, carrying out repairs, or meeting tenants. This might include fuel, maintenance, and even depreciation on the vehicle, as long as the travel is directly related to managing your rental property. Basic in the process is keeping a detailed logbook of mileage, as well as receipts, to substantiate your claims.
7. Legal Fees
Any legal fees used in buying a rental property are deductible if they are below $10,000. Examples of such expenses are those involved in arranging finance or drafting a tenancy agreement. However, the purchase or sale costs exceeding this limit may not be considered an immediately deductible expense.
8. Healthy Homes Compliance Costs
Meeting the requirements of the Healthy Homes Standards is a legal obligation for landlords in New Zealand. Fortunately, the expenses related to meeting these standards-insulation, heating, ventilation, and moisture barriers-are deductible. Keeping your property compliant not only protects your tenants' well-being but also offers financial benefits through tax deductions.
9. Loss Ring-Fencing
One crucial tax rule landlords should be aware of is loss ring-fencing. This rule prevents landlords from offsetting rental property losses (where expenses exceed rental income) against other income, such as salary or wages. The losses can only be carried forward to offset future rental income or profits from the sale of the property. Understanding what expenses you can claim is key to optimising your rental property's financial performance. By claiming the right deductions—from interest on loans and property maintenance to vehicle expenses and depreciation—you can reduce your tax burden and boost the profitability of your investment.
As tax regulations evolve, it’s wise to consult with a tax professional or accountant to ensure you’re taking full advantage of available deductions and staying compliant with the latest rules. Additionally, keep detailed records of all expenses related to your rental property to make the most of these deductions when filing your taxes.