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TAX ON RENTAL INCOME EXPLAINED

By Trish Willis | Member of the Property Institute of NZ (IPAC)

Property investor tax advice in a nutshell - includes definitions, tax laws and obligations, expenses you can claim and tax payable when buying or selling a family home.

Know IRD's tax definitions

If you own rental property the tax you should pay will depend on whether you are a residential rental investor or a dealer in residential rental properties according to the Inland Revenue Department.

Rental property investors - buy property and use it to generate on-going rental income, without any firm intent of resale. Investors pay income tax on their net rental income but generally not on the eventual sale proceeds of the property.

Property speculators - buy a property always intending to sell it. Property dealers have established a regular pattern of buying and selling property. Both speculators and dealers must pay income tax on any gain they make from reselling property, if their property fails the bright line test, even if they rented it out before it was sold says IRD.

Planning to sell your investment property? Find a vetted real estate agent you can rely on.

THE BRIGHT LINE TEST AND TAX ON RENTAL INCOME

The bright line test has recently changed from five to ten years for properties bought after March 27, 2021. Properties sold within these time frames are subject to tax on any profit made through an increase in value.

They must also pay tax on rental income and GST may be applied.

Due to recent Government changes, property investors will no longer be able to offset their mortgage interest expenses against their rental income when calculating their tax. The full effect of these changes will not come into play until 2025 to give investors time to adjust. You can find out about this deductions rule change here.

Speculators and dealers can usually claim the cost of a property in the year it's sold.

Residential property used to provide short-stay accommodation is also now subject to the bright-line test where the accommodation is provided in a dwelling that is not the owner’s main home. If so, you might want to find out when a good time to sell is.

Know your landlord obligations under February 2021 changes to the Residential Tenancies Act.

NITTY GRITTY on IRD RULES for investors

The IRD website provides the most reliable source of tax related information for property investors and landlords.

Before buying another residential investment property, read up on IRD's information about investment property tax laws.

Check out the online property tax decision tool, to help you work out if the property you are buying or selling is taxable under any of the property rules.

See the Inland Revenue's information on residential rental income and paying tax on it.
If you're thinking of purchasing an additional residential rental property, this link will help you find out what you need to know about buying or selling a property in the first place, including tax-related requirements.
Learn more about 2021 changes to the bright line property rule
The expenses you can and can’t claim in tax returns.

Find a rental tax accountant

Some people who provide tax services are not licensed accountants so be careful who you hire.

If you don't already have a tax accountant, the NZ Institute of Chartered Accountants has a database. Just choose your location.

Find out about tax when buying or selling your family home, not an investment property.

Find out about selling an investment property

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Page updated October 20, 2022 by Trish Willis | Member of Property Institute of NZ (IPAC)

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Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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