End of the financial year tax considerations for residential rental property owners

With the end of the financial year (31 March) approaching, property owners should focus on their financial planning, accounting and tax obligations, and potential tax deductions. There are several factors that can help prepare for year end and ensure tax compliance in a timely manner.

Review income and expenses

Prior to the year end, review all your income and expenses. If you have a separate bank account for rental income and expenses, that makes light work of this process.

Rental income

Ensure you have received all the rent payments in your bank. If you notice any discrepancies, get in touch with your Harcourts property manager or tenant at the earliest. Take note of any rental arrears and follow up or take remedial action swiftly.
If any portion of the rent is nonrecoverable, it should be written off prior to the year end to avoid paying tax on income that you will not receive.
Review other receipts. Any cash incentive received from the bank to draw a mortgage or to refinance a loan for a rental property is taxable when received.

Rental expenses

Keep detailed records of all expenses associated with your rental property. The common expenses you can deduct from your rental income are:

Advertising costs to advertise your property for a new tenancy
Costs for drawing up a tenancy agreement
Costs for evicting a tenant
Depreciation on fixed assets
Insurance premiums including loss of rent and excess paid to get an insurance claim
Legal fees for buying a rental property, if the legal expense for that year is $10,000 or less. Other legal fees for refinance, tenant eviction, rent recovery etc. are also deductible
Mortgage interest is 80% deductible (100% for new builds) from 1 April 2024, 100% from 1 April 2025
Property management fees
Rates
Repairs and maintenance costs (further detail follows)
Tax return preparation fees
Travel expenses for travelling to inspect your property or to do any maintenance work.

Repairs & maintenance considerations

Improvements to the property are capital expenditure and nondeductible. In case of major work, you may get depreciation deduction for separately identifiable assets like carpet, appliances etc. and qualify for deductions if work is done to repair wear and tear or maintain an asset in its original condition.

Low value assets below $1,000 can be claimed as an expense in the year of purchase, if certain conditions are met.

Improvements made to comply with Healthy Homes Standards may require revenue and capital split.

Note that repairs undertaken by owner’s personal labour cannot be claimed, but parts and consumables can.

In these situations, it is important to keep a detailed record of work done and obtain a breakdown of costs for separate items.

Payment of provisional tax

If you had to pay more than $5,000 tax at the end of the year from your last tax return, then you are considered a provisional taxpayer. Provisional tax helps you manage your income tax. You pay it in instalments during the year instead of a lump sum at the end of the year.

Review your provisional tax payments to ensure you have paid the required amounts. You may be charged interest and penalties for underpaid amounts. If you are not a provisional taxpayer, but believe that you may have tax to pay, then get in touch with your accountant as soon as possible after year end to finalise your tax position. You may also need to keep aside funds for tax payments

Review your property portfolio and structure

The end of the financial year is a useful time to stand back and assess your property holdings. There are certain questions that may help with finance and tax planning:

Are there any properties that require extensive maintenance or upgrades?

Consider having a long-term maintenance plan to spread costs and maximise tax deductions.

Are you considering buying new rental properties?

Banks will generally require details of your assets, labilities and income to provide finance to buy a new property investment. Ensure you have your financial records in good order. Keep your financial adviser, lawyer and accountant in the loop to get the necessary documents reviewed and approved in time.

Are you considering selling any rental properties?

Although New Zealand does not have a ‘capital gains’ tax, there are other land provisions that may result in a tax bill when you sell a property that is not your main home. Brightline taxes the gain on residential rental properties sold within two years and there are other rules to consider regarding association with a developer/dealer/ builder, intention at time of purchase, major development etc, and it is important to obtain advice from your accountant and lawyer.

Is the holding structure meeting your needs?

The properties may be held in personal names, a partnership, a look through company (LTC), ordinary company or a trust. Consider if the structure is appropriate for asset protection, succession and/or tax purposes.

Consult your tax advisor

Your tax advisor can keep you in the good books of the Inland Revenue Department. With the ever-changing tax laws, consulting a tax professional can help you comply with tax obligations, obtain tax planning advice and help you achieve the most efficient structure for your property investments.

Disclaimer

This information is for general education purposes only. It does not cover all situations and circumstances and should not be taken as direct tax advice. If you are looking for specific help, please contact BVO (Stephen Rutherford or Julia Owens) to provide specific tax advice.