Expenses that are deductible for tax for investments in New Zealand property follow the general principle that the expenses should have been incurred in connection with the property. Thus expenses of the following nature would be fully deductible for tax:
– Accountancy fees for the preparation of property accounts,
– Bank charges both for loan applications and administration fees provided they relate to the property
– Small items of routine repair say for less than $5oo
Certain expenses, to be eligible for tax deductions, require some explanation.
Home office expenses: This is the claim for a tax deduction if you are running your property business out of your home. The costs that can be claimed include proportionate amounts of mortgage interest payments, insurance, utilities and so on.
The New Zealand IRD department is unlikely to allow home office expenses in the case of properties that are passively managed. In other words, your property investment needs to be actively managed and to qualify as a business. To qualify, the home office must not include a bed. Apparently, the IRD department have been known to check. Consult a chartered accountant if you have any doubts.
Insurance: Any legitimate expenses in connection with insuring your home and its contents are fully deductible for tax purposes. Many property investors take out home and contents insurance on their income properties because many items are not covered by the replacement cover of a home insurance policy. Banks often stipulate mortgage insurance cover in the case of a high loan to value for income properties. These premiums are also fully deductible.
Legal fees: There are two elements to the fees – mainly fees for property conveyancing and fees for mortgage registration. The IRD will allow the deduction for mortgage registration but considers the conveyancing costs to be a capital cost and therefore not deductible. It is advisable to ask your lawyers to bill separately for the two elements. If no split is readily available, the normal practice is to claim a deduction of 50 percent of the total bill.
Interest costs: This is by far the highest cost that a property investor is likely to incur and therefore requires careful consideration. The cardinal principle is that the borrowing on which interest deductions are being claimed should have been used for the sole purpose of acquiring the income property. If the borrowing for the acquisition of the income property is not properly structured, there can be a considerable loss of tax efficiency. The situation is quite complex and you should consult your chartered accountant before structuring the finances.
Investing in New Zealand property can be a rewarding experience but before you begin to do so, retain the services of a top-notch accountant to handle your tax.