Being a landlord can be taxing in more ways than one. The most common errors landlords make, says KPMG tax expert Ross McKinley, are to do with tax on capital gains. Last year as part of a plan to slow Auckland's property market, the Government changed the rules for property investors.
The new law is that if the property is sold within two years, the tax on the gain has to be paid when you fill in your tax return, McKinley says. Accountants call this new rule the "bright line" test. It does not apply to the family home.
McKinley is accounting firm KPMG's senior tax partner. He advises this country's larger property companies about tax issues. He suspects people will end up holding on to the properties for longer, as a result of the law.
Will the Inland Revenue Department crack down with this new tax test? McKinley says the IRD is on record saying it has dedicated some money to focusing on the property sector -- landlords and investors.
The largest proportion of landlords are probably "flatmates" or boarders. Let's say you are a single person who owns a four-bedroom house near town and a large mortgage. You let out the three spare bedrooms. The income from your boarders may approach the same amount as your salary. In all likelihood few people in this situation probably pay tax, but legally they should. The landlord can, of course, claim expenses, such as rates, lawn mowing, cleaning etc.
McKinley says the hardest cost to deal with is bank interest, and, if you are thinking of claiming it, you probably need to get advice. Briefly though, the IRD's website says if the house is let out, you can claim the interest so long as you have not borrowed the money for some other purpose.
Depreciation is not a simple issue particularly if you have boarders and share things. Generally, according to the Inland Revenue Department publication Managing Rental Property (IR264), you can claim depreciation for things such as appliances, but not for the house itself.
Home and incomes are probably the next step up for landlords. The property may have a granny flat or be semi-detached or have a separate dwelling on the same section. If it's all hunky dory, the flat has its own power and water meter. But many homes have been converted illegally sometimes because the council has opposed a conversion, sometimes just to save money.
McKinley says you need to estimate what proportion of the service the tenant uses, when you work out your costs.
The next step up is owning a separate rental property. If it is just one property, McKinley reckons it is generally not necessary to set up a company. An added cost you can claim is property manager fees.
A common practice among landlords is to transfer the debt from the mortgage on their family home to the rental property, then claim the interest as an expense. Here there is no simple answer, but "the borrowing must relate to the rental property," McKinley says. It may not be as easy as the average punter thinks.
Owning multiple properties is obviously the next step -- this is when people are running a small business. GST is not charged on residential properties. Apartments can be a grey area, with GST registered and non-registered owners in the the same block. "If you own an investment apartment with a management or service agreement in place, there may be GST implications to consider," says the IRD in an online document Managing Rental Property.
For those medium to larger concerns, some people use a "vehicle", which could be a trust, or a so-called "look through company" where the tax is transferred from the company to the shareholders. LTCS are recognised by the IRD and there is a document about them on its website.
The loss-making companies favoured by some investors a decade back (LAQCS) are no longer in general use.
The other vehicle, the one you use to visit tenants, you can legitimately claim mileage on, says the IRD's website. But perhaps it should be a Toyota rather than a Mercedes AMG.
Not only is the mileage rate the same, the tenants may be inclined not to be jealous, unless you are operating in a very upmarket sector.