Generally, any income that you receive from renting out property will be liable for income tax and hence you must include it in your tax return.
This income could be from renting out land or buildings, or income earned by having private boarders or flatmates living with you.
Most expenses you incur in earning your rental income are deductible, including rates and insurance, interest paid on money borrowed to finance your property, agents fees and commission, repairs and maintenance (except if they substantially improve the property), motor vehicle and travel expenses and legal fees for arranging the mortgage or finance to buy the property.
From the 2010 income year and beyond, legal fees for buying and selling a property can be deducted, provided your total legal expenses for the income year, including the fees associated with buying and selling a property, are equal to or less than $10,000.
Before the 2010 income year, legal fees for buying and selling a property were not deductible.
Mortgage repayment insurance, accounting fees for the preparation of accounts and depreciation are also deductible. From the 2011-12 income-year, the rate of depreciation on buildings has reduced to 0% where buildings have an estimated useful life of more than 50 years.
What if the property is not rented out for the full year? For example, what do you do if your home was rented out during the Rugby World Cup?
You can only claim deduction for any expenses that you incur while your rental property is either rented out or available to be rented out.
If the property is neither occupied by tenants nor available for rent for part of the year, you will not be able to claim the full year’s ongoing costs, such as rates, insurance and interest.
Let us for example, say that you own a property in which you lived for the first three months of the year and then rented it out for the rest of the year. When you work out your rental income for the year, you can only deduct the ongoing costs for the nine months that the property was rented out, that is 9/12 of the expenses.
If a property is unoccupied and temporarily unavailable for letting for a short time, because of redecorating or other maintenance, the ongoing costs will still be deductible for that period.
The redecorating or maintenance costs will also be deductible, as long as the work done does not amount to making capital improvements.
You can learn more about rental income (including how to treat income from private boarders) online ww.ird.govt.nz (type ‘rental income’ under Search).
Many of our nationwide seminars cover the tax implications of rental properties.
You can register to attend online.
Abdul Rafik is Inland Revenue’s Community Relationships Advisor based in Auckland. He is happy to answer readers’ queries, which should be sent to