Did you know that if you own a rental property, you can deduct a number of expenses when it comes to your end of year tax return? Many landlords are unaware of the savings that they could be making from a tax perspective and this is losing them hundreds or even thousands of dollars a year from not claiming the right expenses.
In order for an expense to be claimed these costs must be related to the costs of generating rental income, and they cannot be for personal use. It's easy to forget what you're entitled to as a landlord when it comes to tax deductions which is why we have compiled a list of items that should be on your to-do list when filing your taxes.
But first, let's talk about property management fees and whether they are tax-deductible, helping to offset losses. In short, yes, you can claim 100% of any fees or commissions paid to your property manager/property management business for collecting rent, maintaining your rental, or finding tenants on your behalf. Advertising for your property, credit checks, and legal fees are all examples of administrative expenses that can also be written off in full. This is where working with a property management company comes in handy.
If you use a property manager for select services while you manage the property yourself, you can claim 100% of the fees charged to you by the property management company. These include consulting, inspection, or tenant vetting services.
There are a number of additional expenses you can also claim when it comes to your tax filing. Obtained directly from the New Zealand Inland Revenue Department.
Other expenses you can deduct from your taxes
Some Healthy Homes upgrades
With the latest Healthy Homes requirements, landlords are required to insulate their properties in order to keep them warm and cosy, facing fines of up to $4,000 if a property does not meet the necessary insulation level. Of course, owners want to know if the cost of upgrading or installing insulation, heating and other Healthy Homes requirements is tax-deductible. The answer is a little more complicated because there are several elements that influence whether or not you are eligible to file a claim.
If new insulation is being installed, the costs associated with the installation are likely to be deemed a capital improvement. Because of this classification, no tax deductions are permissible. Existing insulation that has deteriorated over time and needed to be replaced (or enhanced) to meet minimal standards would certainly be deemed tax-deductible. If your insulation problems lie somewhere between replacing and improving, you should check with the Inland Revenue Department (IRD) to see if any expenditures can be deducted or seek advice from your accountant.
Insurance and rates
You can claim the cost of insuring your rental property and the council rates in regards to the ownership of the property.
Many property owners engage a professional accountant to complete all of the financial aspects of their rental. Accountants will guarantee that you are in full compliance with IRD while also keeping an eye on expenses and income to ensure that you make the most profit possible. Fees for tax preparation, account management, and general counselling can all be claimed.
Repair and maintenance costs
Rental expense deductions are divided into several categories. Certain expenses can be deducted on the whole, whereas others, such as capital improvements, must be depreciated. One of the biggest taxation pitfalls accountants find when it comes to clients looking to claim on maintenance costs is claiming for ‘maintenance’ that is really improvements.
Certain expenses can be deducted, whereas others, such as capital improvements, must be depreciated. Patching walls, restoring broken windows, and repairing appliances are all examples of maintenance expenses that can be written off in full. Capital expenses, such as a new roof, an expansion, or a remodelled basement, must be depreciated because they add to the value of your home or extend its useful life. It pays to discuss these capital expenses with your accountant as in some cases these may not be tax-deductible.
If your legal fees total less than $10,000 in a year, you can claim a deduction for them when buying a rental property. You may also be able to claim legal fees incurred when selling a rental property.
Expenses you cannot deduct from your taxes
There are a number of expenses that you cannot deduct from your rental income. Many of these expenses are costs that are incurred with a set purpose to increase the value of a capital asset meaning you are able to make more money long term. These have been sourced directly from the New Zealand Inland Revenue Department.
- Capital expenses.
- The purchase price of a rental property.
- The principal portion of mortgage repayments.
- Until recently, you could claim the interest charged on money you borrowed to buy a rental, however these rules have changed. Please contact your professional advisors to see what these changes will mean for you.
- Costs of making any additions or improvements to the property. Cost repairing or replacing damaged property, if the work increases property value.
- Real estate agent fees charged as part of buying or selling the property.
- Depreciation on the rental's land or buildings.
- Your time when you do repairs and maintenance work yourself.
- Legal fees involved with selling the rental property (unless you’re in the business of providing residential rental accommodation).
At the end of the financial year, if you have your property managed by McDonald Real Estate, you should receive an annual summary documenting all income and costs for that financial year. This will aid your accountant in the preparation of tax returns and cost claims. If you are looking to seek professional and reliable property management or advice, our trusted team can help. To find out more on rental property deductions, please speak to trusted financial advisors.
Request a no-obligation property appraisal and let us talk you through our services and fees, and remember here at McDonald Real Estate we don’t lock our landlords into long term contracts.