Frequently-Asked-Questions

Residential Property Investment FAQ

What claims are available for Residential Property Investment, how does tax work?


Residential Property Investment

Residential Property Investment is extremely popular in New Zealand and has made a lot of people very wealthy over the last 30-50 years.

A long-term buy-and-hold residential property investment strategy with a focus on yield and an awareness of the incidental capital gain can create massive sustainable wealth in the medium to long term, with acceptably low risk.

When you have a residential investment property, tax is payable on the net profit you generate each year – rent minus expenses. The following is a list of most or all available tax claims to ensure you pay the lowest legal amount of tax on your residential property investment activity.

Expenditure

Detail

Treatment

Accounting Fees (Ongoing)

Costs incurred for the preparation of financial statements and tax returns relating to the rental property activity.

Fully deductible expense

Legal Fees (Pre-Purchase)

Costs incurred for investigating the viability of a purchase, and conveyancing costs to purchase the property (same treatment for property sales).

If total legal fees for the year are under $10,000 including GST, this can be claimed in full in the year it is incurred.
If total fees are above the threshold, this must be capitalised into the purchase price of the property. Mostly non-deductible cost.

Legal Fees (Lending & Other Matters)

Costs incurred for arranging finance, preparing tenancy agreements, or for any ongoing business matter after the purchase of the rental property.

Fully deductible expenditure in the year incurred.

Valuation Fees

Cost of property valuer’s professional fees

If undertaken on a property already owned, fully deductible. This includes chattels valuations, valuations for finance purposes, and valuations undertaken to ensure the property is adequately insured.

If undertaken pre-purchase, deductible only if required for finance purposes.

Repairs and Maintenance

Usual repairs and general maintenance. Costs such as painting, fixing holes in walls, broken windows, electrical issues, replacing a broken shower head, redecorating.

Usually fully deductible in the year they are incurred.

Important to consider whether the work is capital improvement – in which case it must be capitalised and depreciated, and where the repairs are to the building itself this means it is non-deductible.

Note: If property was recently purchased, repairs are considered dilapidation expenditure, and non-deductible. This is because IRD consider that you purchased the property at a discount due to its deferred work required – whether this is actually the case or not.

Healthy Homes Expenditure

Required expenditure to bring a home to the standard required to meet Healthy Homes regulations. Costs such as insulation, heating, draught-stopping, moisture extraction.

See: Repairs & Maintenance

Particularly important to consider whether the work is capital, this is highly likely in the case of many Healthy Homes costs.

Mortgage Payments (Interest Portion)

Regular mortgage repayments on loans borrowed for the purposes of rental property purchase or other related activities.

Note it is the purpose of the loan that determines deductibility, not the security of the loan. A loan secured against your rental but borrowed for private purposes remains a private loan.

Prior to 1 October 2021, interest payments were fully deductible. After this date, it gets a bit complicated.

Note that it is the purpose of the loan that determines deductibllity, not the security of the loan.

If your property is a “new build” you will be able to claim interest in full for an expected 20 years from its CCC date.

If it was not a new build and you acquired it prior to 27 March 2021, interest is being phased out from 1 October 2021 to 31 March 2026, and non deductible thereafter.

If your property is not a new build and you acquired it on or after 27 March 2021, interest is fully non-deductible from 1 October 2021.

Principal repayments are always non-deductible. These reduce your total debt owing, and are thus not an expense but a form of savings.

Bank Account & Mortgage Fees

Loan Fees & ongoing bank account monthly and processing fees

Fully deductible for accounts and loans relating to the purchase of the property and ongoing rents and expenses.

Insurance

Building, contents, and landlord insurance policies relating to the rental property. Mortgage protection insurance relating to mortgages raised for purchasing the rental.

Fully deductible expense

Rates

Local and Regional council rates relating to the rental property, as well as landlord-portion of water rates if applicable.

Fully deductible expense

Cleaning & Rubbish Removal

Cost of bringing the property to rentable standard between tenancies – a form of Repairs & Maintenance.

Fully deductible expense

Gifts

Gifts purchased for tenants, or others related to your property business – tradespeople, property managers, even your accountant if you were feeling generous.

Fully deductible expense – except if the gift is food or drink, then only 50% deductible.

Life Insurance

Private life insurance for the owners of the property

Fully deductible expense only if  required by the bank as a condition of finance.

Otherwise, private cost and non-deductible.

Property related subscriptions, training and seminars

Subscription to property magazines, property database subscriptions, membership to property investor associations, attendance of industry events.

Fully deductible expense

Home Office & Telephone Costs

A portion of your home operating costs – insurance, rates, mortgage interest, power, and phone/internet charges.

Only applicable if you manage your own properties – if you hire a property manager it is much harder to justify any such claim.

Fully deductible expense – calculated as a portion of your own home costs usually based on floor area.

Vehicle mileage and inspection costs

Costs incurred in relation to travel to and from the rental property for regular inspections or maintenance.

Fully deductible expense. Must keep a log book showing dates, distances, and purpose for the trip. Can claim a mileage rate set by IRD each year; 79c per KM as at the time of writing. Or if vehicle use is extensive can claim a percentage of total running costs of the vehicle.

Note that travel for the purposes of sourcing a new investment property is non-deductible and should be capitalised into the cost of the purchase – but practically is usually just ignored.

Property Management Costs

Fees paid to a property manager for finding tenants, collecting rent, and arranging repairs and maintenance.

Fully deductible expense

Advertising for new tenants

Fees paid to newspapers, TradeMe, or a professional finding services to obtain tenants or tradespeople.

Fully deductible expense

Purchase of separate assets/chattels

Buying new items for the property, separate to the building itself such as ovens, dishwashers, heatpumps, carpets, or a garden shed.

If under the de minimis threshold ($500 before March 2020, $5,000 until March 2021, and $1,000 thereafter) this is a fully deductible expense claimed in the year of purchase.

If over this threshold the purchase must be capitalised (shown as an asset, not an expense) and depreciated. It is still fully deductible but this deduction is spread over several years.

Expenditure

Detail

Treatment

Purchase Price of Rental

The overall cost of buying the property itself, the amount on the sales and purchase agreement, plus any finders fees if applicable.

Must be split into its component parts:

Land – Capitalised, no depreciation claim.
Buildings – Capitalised, 0% depreciation claim for residential property
Chattels – Capitalise and depreciate over useful lifetime

Purchase of other assets

Expenditure which creates a distinct asset (heat pumps, carpets, curtains, dishwasher) separate from the property itself.

Must be capitalised and depreciated over its useful life – you still get the full claim, but it may take many years.

If the asset costs less than the ‘de minimis threshold’ ($500 prior to March 2020, $5,000 from March 2020 to March 2021, $1,000 thereafter) it is fully deductible in the year of purchase.

Tax Payments

Payments to IRD for the tax on income earned in previous years (or the current year, in the case of provisional tax).

Tax expense is recognised in the year it was incurred, as a non-deductible expense. The actual payment of the tax (in many cases, a full year later) is the payment of a liability – like paying down a loan – and does not hit the income statement at all.

Accounting Fees (Pre-Purchase)

Costs incurred for investigating the viability of a purchase – checking yield/profitability projections, general advice relating to property suitability.
Note: No charge for this service with AAT Accounting in most cases.

Capitalised into the purchase price of the property. Mostly non-deductible cost.

Legal Fees (Pre-Purchase)

Costs incurred for investigating the viability of a purchase, and conveyancing costs to purchase the property (same treatment for property sales).

If total legal fees for the year are under $10,000 including GST, this can be claimed in full in the year it is incurred.
If total fees are above the threshold, this must be capitalised into the purchase price of the property. Mostly non-deductible cost.

Repairs and Maintenance shortly after purchase

Dilapidation expenditure – maintenance undertaken shortly after the purchase of an asset.

If undertaken shortly after a property is purchased, this is usually considered dilapidation expenditure, and non-deductible. It must be capitalised and added to the cost of the building. This is because IRD consider that you purchased the property at a discount due to its deferred work required – whether this is actually the case or not.

Real Estate Agent Fees

Fees relating to the sale of a rental property, advertising, staging, etc.

The sale of a rental property has no nexus to the taxable activity, and is non-deductible.

Note that if the sale of the property itself is taxable due to Bright Line, Intention Test, or any other provisions of the Income Tax Act, the cost of sale is deductible.

Mortgage Principal Payments

Principal portion of regular mortgage repayments or lump-sums paid

Principal repayments are non-deductible. These reduce your total debt owing, and are thus not an expense but a form of savings.

Property is an excellent asset class to invest in, but the tax loopholes regularly cited by the media are a complete myth. Residential property investment is actually the most harshly taxed asset class in the whole of the New Zealand tax system. The bright line rule, intention test, and ring fencing tax losses are the biggest hurdles.

The Bright Line rule (introduced in 2015, extended in 2018) makes capital gains on the sale of residential property taxable if sold within 5 years, with very few available exceptions. Note that this can even catch some owner-occupied property, and unfinished property bought off the plans and sold before settlement.

Ringfencing of rental losses (introduced in 2019) means that when your property portfolio makes an overall loss this cannot be offset against other income to generate tax refunds. You still get the benefit of these tax losses eventually, they offset future profits generated by the portfolio.

The Intention Test (been around for ages) is like a Bright Line test but with no time limit. If you purchase a property with the firm intention to sell at a profit this sale will be taxable for all time – the only way to get out of the intention test without paying tax is to pass it on in your will. But if your intention when buying the property is to hold long term and seek rental income, the eventual sale is usually tax-free.

There are other sections of the tax act that can result in your residential property being taxable. Being an active property trader, being related to a builder or developer, having a pattern of buying and selling, undertaking a subdivision, rezoning provisions… there’s a lot of places to be careful of.