Many people who own holiday homes, including property investors, are reportedly renting their baches to help get through the tough times, but is everyone clear about the associated tax rules?
According to industry sources property investors are amongst the Kiwi bach owners renting out their holiday homes in an effort to generate additional income, but while most investors are well aware of the tax treatment associated with their rental property portfolio, can the same be said when it comes to renting their holiday home from time to time?
The following are Inland Revenues “general principles”:
Any rental income received is taxable and should be returned in the owner’s tax return for the income year in which it is received, regardless of whether the activity amounts to a business or whether market rates are charged.
Whether any expenses incurred in owning the holiday house are deductible, depends on their connection with the income earned.
If the holiday house is rented to a tenant on an arm’s length basis for a long term stay then the owner is generally able to apportion expenses on a time basis. However, if it is rented out for only some of the year the owner’s ability to deduct expenses depends on whether the expenses have sufficient connection with the earning of rental income.
If a holiday house is essentially available only to the owner and their family and friends then the Inland Revenue applies a range of specific principles (outlined on www.ird.govt.nz) which cover, for example, the treatment of situations in which a holiday house is used by friends or family who are not charged rent, but instead make a minor contribution towards the owners expenses.
In terms of meeting the statutory test, if the holiday house has mixed uses, the ability to deduct expenditure comes down to a case by case assessment that weighs all the evidence.Objective evidence is required that the holiday house is genuinely available for rent and that there is a real prospect of occupancy and rental income being earned. This needs to be considered separately in relation to each year.
For more information visit Inland Revenue and search for “holiday houses.”