Investing in rental property is not just about the rental income; it’s about maximizing your returns by minimizing your tax liability. Tax deductions are essential tools for rental property owners to offset costs associated with managing and maintaining their properties.

In New Zealand, particular attention must be paid to rental property tax deductions due to recent changes in tax laws. This guide will provide clarity on what you can claim, how to maximize your claims, and the implications for different types of rental properties.

Definition of Tax Deductions

Tax deductions are expenses that can be subtracted from your taxable income, thus potentially reducing the tax you owe. With rental properties, deductible expenses are those that can be attributed to the property's upkeep and operation.

Deductible Expenses

Here’s a list of deductible expenses that can be legitimately claimed against your rental income:

• Insurance costs for your rental property
• Property rates
• Fees paid to agents for services like rent collection, maintenance, or finding tenants
• Accountant fees for managing accounts, tax returns, and advice
• Costs of repairs and standard maintenance
• Fees for acquiring a mortgage for the rental property
• Tenancy agreement fees
• Valuation costs required for mortgage (excluding insurance valuations)
• Legal action costs to reclaim unpaid rent
• Eviction related costs
• Depreciation on non-property related capital expenditure
• Travel expenses related to property inspection or repairs
• Legal fees for purchasing a rental property (up to $10,000)

Non-Deductible Expenses

There are also certain expenses that cannot be deducted against your rental income:

• Capital expenditure
• The purchase price of a rental property
• Mortgage principal repayments
• Costs related to property enhancements or improvements
• Costs associated with repairing or replacing damaged property if it increases the property’s value
• Real estate agent's fees for buying or selling the property
• Depreciation on land or buildings
• Time spent on repairs and maintenance work
• Legal fees for selling the rental property (unless providing residential rental accommodation is your business)

Repairs, Maintenance and Capital Improvements

There's a clear distinction between repairs and capital improvements:

• Repairs and maintenance involve restoring the property to its previous state (e.g., fixing a broken window or repainting)
• Capital improvements enhance the property beyond its original state (e.g., adding an extra room)

Body Corporate Levies

For apartment rentals in unit title developments, body corporate levies are key considerations:

• General levies for maintenance or administration are deductible
• Levies for capital improvements are not deductible

GST

It's important to note that GST is not charged on residential rent and should not be included in GST returns.

Interest Deductions

Interest deductions for rental property loans are dependent on when the property was acquired:

• For properties acquired on or after 27 March 2021, interest is not deductible (unless an exemption or exclusion applies)
• For properties acquired before 27 March 2021, interest deductions are being phased out over 4 income years

For more information or to find related resources, please visit the following page Rental property expenses on the New Zealand Inland Revenue website.