With the end of the 2021-22 financial year, it’s timely to talk about tax on your rental returns.
If you’re making income from a rental property, it must be declared in your annual tax return. You can claim all or some of the maintenance and administrative costs as a deduction against your rental income, reducing the tax you pay on the rental income you receive.
However, recent law changes mean that if you bought (or intend to buy) a residential rental property after 27 March 2021, you can no longer claim a tax deduction on the mortgage interest. New builds are exempt from this rule.
Interest deductions are still allowed for property bought before 27 March 2021 but will be phased out over four years.
The law change also means that, regardless of when you bought the property, you can only claim deductions up to the amount of rental income you earn in a year (including income from the sale of a property). This is called ‘ring-fencing’.
I learned things I thought were no longer possible – being able to offset your expenses against tax!
Any excess deductions must be carried forward from year to year and deducted when your residential property makes income.
You need to keep accurate records for your residential rental property to calculate your income and expenses – and these records must be kept for seven years, even if you sell the property in that time.
A major benefit of having your rental managed by a property manager is that we prepare those records for you. We provide detailed bi-monthly financial statements, including copies of all invoices. These include repairs and maintenance, which are tax-deductible.
You can also claim 100% of the fees or commission paid to your property manager for collecting the rent, maintaining your rental, or finding tenants for you.
Here’s a summary of deductible expenses relating to your rental property, based on information on the IRD website:
- Insurance and rates
- payments to a property manager
- accountant’s fees
- repair and maintenance costs (Note: the distinction between repairs and improvements can be tricky and if you’re unsure whether work done on your property is repairs or maintenance, talk to your accountant)
- fees for arranging a mortgage to buy the rental property
- valuation to get a mortgage, but not insurance valuations
- mortgage repayment insurance
- depreciation on capital expenses
- travel expenses for travelling to inspect your property or do repairs
- legal fees for buying a rental property, up to $10,000
As noted above, if you bought your rental property before 27 March 2021, you can also deduct interest on the money you borrowed to buy it. You can’t deduct this if you used some of the money for something else, or to top up the mortgage for another purpose.
At Angel Property Managers, we’re experts at managing your rental property and leaving you to do whatever you’re best at. However, we’re not accountants and the information provided in this blog should not replace expert advice from your accountant.
If you’d like to save yourself the time and hassle of collecting and collating all the financial information your accountant needs to include your rental income in your tax returns, give us a call today.