Holiday Homes Beware

Posted on Monday, September 24 2012

New Zealand Holiday Homes

 

When the National Party released the budget in May 2012, they signalled changes to the way holiday homes were to be treated for income tax purposes. On 13 September 2012, the government released the tax bill that contains those proposed changes.
While the tax bill is not yet finalised, I don’t expect the final version to be much different to the proposed changes in the tax bill that will come into force on 1 April 2013.

Background

The accepted rule with rental properties is that expenses can be claimed as long as the property is “available for rent”. While this rule works well with standard rental properties, the government felt that this “accepted rule” was being abused by people with holiday homes. Effectively, many people with holiday homes were treating the property as “available for rent” at all times that it wasn’t being used privately, so the percentage of expenses claimed against the holiday home rental income was viewed as excessive in many situations.

The New Rules

The new rules will apply to a holiday home that is rented out, used privately and is not used for at least 62 days in a tax year. In my experience, this will capture the vast majority of holiday home rental properties.

So, here is a summary of the two new rules to impact on holiday home rentals.

Rule 1 – Proportion of Rental Use

You will be able to claim expenses for each night the holiday home is rented out. You will not be able to claim any expenses for each night the holiday home is used privately.
For the nights that the holiday home is empty, the percentage of expenses that can be claimed is calculated by using the following formula:

Nights Rented ÷(Nights Rented + Nights used Privately)

For example, let’s say you rent out your holiday home for 30 nights and use it privately for 60 nights. The percentage of expenses that can be claimed for the empty nights is 33.33% (30 rented / 90 total use).

The percentage of expenses for the tax year would be:
Rented out 100% for 30/365 8.22%
Empty 33.33% for 275/365 25.11%
Private use 0% for 60/365 0%
Total 33.33%

The percentage of expenses to claim for the whole tax year will always be the same percentage as the empty percentage calculated under the formula above.

To maximise the percentage of claimable expenses, using the holiday home for private use as little as possible will provide you with the best outcome.

The amount of private use will be determined by your record of the dates that the holiday home is rented out and the dates that the holiday home was used privately. As always, it is important to keep an accurate record of the property’s use.
How the IRD plan to ensure that your record of the property’s use is accurate is not mentioned in the tax bill. As with all other tax records, it will not be up to the IRD to prove that you used the Holiday Home privately more than your records may show, the onus of proof is on you to show that your records are indeed accurate. Having said that, I can’t see how anyone could prove or disprove the nights a holiday home was used privately so I’m guessing the IRD will have some sort of reasonableness check when auditing such holiday homes.

Rule 2 – Quarantining Expenditure

The amount of any holiday home loss is quarantined (ie not offset against other forms of income) if the rental income is less than 2% of the cost of the holiday home or its rateable value.

For example, let’s say you have a holiday home that was purchased for $500,000 and that the rateable value is now $600,000. The holiday home earns annual rent of $10,000 and there are $15,000 of claimable expenses.
Previously, the $5,000 loss might be included in your personal tax return and you might get a tax refund due to that. Under the new rules, 2% of the rateable value is $12,000. Therefore, only $10,000 of expenses are able to be claimed with the remaining $5,000 being carried forward to be offset if the rental income is greater than the expenses in any future years.

On the basis that most properties increase in value, you should multiply your holiday home’s rateable value by 2% to see what the minimum level of rent is that you should be receiving so that the quarantining rule doesn’t apply to you.

On the plus side, if a holiday home consistently has losses that are quarantined, there is now an option to not file a tax return with that quarantined loss at all to reduce compliance costs in that situation.

 

Tony Thorne
www.ThorneAccounting.co.nz
New Zealand Holiday Homes and Rentals

 

 

 

 

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Tony Thorne

Thorne Accounting has been providing specialised accounting and tax services to residential and commercial property investors since 2004. Our mission is to provide the highest quality tax and accounting services to property investors. We are constantly fine tuning the way we work with property investors so we can provide this superior service at competitive prices.

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