Tax for rental property owners: what's deductible, and the rules that keep changing

Tax for rental property owners

Rental income is taxable and must be declared. Many of the costs of running a rental are deductible against it. The difficulty is that several of the most significant settings have changed repeatedly, and guidance written even two years ago may describe rules that no longer apply.

Check the current position with Inland Revenue or your accountant before acting on anything here.

Generally deductible

• Rates
• Insurance premiums
• Property management fees
• Repairs and maintenance
• Accountancy and tax agent fees
• Body corporate levies
• Advertising and letting costs
• Legal fees, within specified limits
• Travel to inspect the property, within limits
• Depreciation on chattels

Generally not deductible

• The cost of the property itself
• Capital improvements — deducted through depreciation where applicable, not as an expense
• Principal repayments on the mortgage
• Costs relating to any private use of the property
• Depreciation on the building itself, which was removed for residential buildings

The repair-versus-improvement line

This is where most errors happen, and where an audit will look first. A repair restores something to its previous condition — replacing a broken window with an equivalent one, repainting a wall that was already painted, fixing a leaking tap. Deductible in the year incurred. An improvement makes the property better than it was, or replaces something substantially in its entirety with something superior — a new kitchen, an extension, replacing single glazing with double glazing. Capital, not deductible as an expense. The grey area is replacement: replacing one rotten weatherboard is a repair, reclading the house is capital; replacing a failed hot water cylinder with an equivalent is generally a repair, replacing it with a substantially better system may not be. Document the reasoning at the time. An invoice describing work as an “upgrade” when it was a like-for-like replacement creates a problem years later.

Healthy Homes work

Healthy Homes remediation sits across both categories depending on what’s involved. Installing insulation where there was none, or a heat pump where there was no fixed heating, generally has a capital character. Repairing or replacing existing compliant items generally does not. Keep the invoices itemised — a single invoice covering both makes the split much harder to defend.

Interest deductibility

Interest deductibility on residential rental property has been amended several times since 2021 — phased out, then reinstated in stages. This is a live setting that has changed more than once and may have changed again. Confirm the current position directly with Inland Revenue rather than relying on any secondary source, including this one.

The bright-line test

The bright-line test taxes gains on residential property sold within a specified period of acquisition, subject to exclusions such as the main home. The bright-line period has been changed repeatedly. Confirm the period applying to your acquisition date with Inland Revenue before making any decision about selling. The period that applies is generally determined by when you acquired the property, not when you sell it.

Ring-fencing of rental losses

Losses from residential rental property are generally ring-fenced — they can be carried forward and offset against future residential rental income, rather than against your other income such as salary. This changed the economics of negatively geared property substantially and is a common misunderstanding among owners who bought before it took effect.

Records to keep

• Rental income, per property
• Every expense with a receipt
• Invoices itemised enough to support the repair-versus-improvement position
• Chattels list with purchase dates and values for depreciation
• Loan documentation and interest statements
• Records of any private use
• Purchase and sale documents, indefinitely

Inland Revenue requires business records be kept for at least seven years. For bright-line and capital-cost purposes, keep purchase and improvement records for as long as you own the property, and afterwards.

Structures

Ownership structure — personal name, look-through company, trust, partnership — affects tax treatment, loss ring-fencing, land tax exposure on sale and asset protection. There is no single best structure. It depends on your income, other assets, number of properties and intentions. This is a conversation with an accountant before you buy, not after.

Frequently asked questions