That's a good question. (See this article if you’re wondering what an LTC is)
IRD says yes, under certain circumstances (NB: this is not necessarily the best way to get into rental investment property. See the bottom of the page for our thoughts). Anyway, IRD recently wrote in TIB Vol. 24 No. 7:
Key points to note are
1. The home is rented “at arm’s length.” It means that each party to a transaction is independent and on an equal footing, despite any family relationship.
2. The sale is at market value. There are no “mate’s rates” here.
Questions? Contact us at EpsomTax.com or on 0800 890 132.
A Better Way to Get a Rental Investment Property
If you do the above, you go from having a medium to small mortgage which is not tax-deductible, to having a large mortgage which is still not tax-deductible. There’s a better way to do things! How? We recommend you talk to Goodlife Advice, who are Authorised Financial Advisors.
Rental Property Losses vs Working for Families Tax Credits
The IRD recently heard the case of a taxpayer in this position. The taxpayer had rental property losses, as they owned several rental properties in a partnership. These were was operating at a net loss. The losses were offset against other income, which increased the taxpayer’s entitlement to Working for Families Tax Credits (WfFTC).
The question was, were these losses claimable for WfFTC purposes? The IRD said “no.” The reason? Despite the losses, the rental properties were found to be a business because they were an undertaking for making a pecuniary profit. The losses could not therefore be offset against other income for WfFTC purposes.
What are the implications? If you have a loss-making rental property/properties, the losses are still claimable. However, you can’t get more WfFTC because of those losses – the IRD appears to view this as a sort of “double-dipping.”
If you have any queries about tricky stuff like this, feel free to contact us at EpsomTax.com or on 0800 890 132.
Valuation of Chattels: why is it necessary? Why should you spend good money ($400 + GST) on getting your chattels valued by a commercial valuation company?
There are a number of good reasons why. Eight, in fact. Here they are:
1. MAXIMISE YOUR DEPRECIATION
By getting a specialist valuation company to do your valuation, you will be able to claim everything that the Law allows. Do it yourself, and you’ll miss something, and, as a result, claim less and pay more tax.
2. MINIMISE RECOVERY OF DEPRECIATION
How so? Arguably, many of the chattels do not increase in monetary value of the term of ownership, therefore, depreciation of such assets is allowable.
3. REDUCE THE RISK OF PENALTIES
Inland Revenue do audit apportionments. It is in the best interests of a commercial valuation company to use calculation methodologies in harmony with established tax law – their reputation depends on it. Therefore, you minimise the likelihood of ending up with questionable deductions and related penalties in the event of an IRD audit.
4. CONSISTENT REPORTING METHODS
Self-explanatory really. A commercial valuation company will give you the same results, every time.
5. MEETING THE REQUIREMENTS OF IRD
As per point three, commercial valuation companies tend to continually research to ensure that their reporting methods are in accordance with IRD requirements and rulings, meaning peace of mind for you.
6. INCREASED CASH-FLOW
Logically, the more you can claim and depreciate, the more money you have. In other words, increased cash-flow.
7. EASY DISPOSAL OF YOUR ASSETS
Any decent commercial-grade valuation system should be detailed enough that if any asset within the property is disposed of they can provide a value for the specific item.
8. A ONE OFF COST
A commercial valuation company report on your chattels forms the basis of the depreciation schedule for the property, which is used throughout the years of ownership. No other yearly reports or cost are necessary.
So, who to choose? EpsomTax.com recommends the services of Valu-it.
Depreciation of Chattels: what is depreciable? what is not? Basically, the IRD gives you three steps to follow.
Step 1: Is the item attached or connected (in some way) to the building? If no, then it is a chattel. If yes, then it possibly is not a chattel. If it is a yes, don’t despair however. Put away those tissues, dry your eyes and go to step 2
Note: if the only connection is that the item is plugged or wired into an electrical outlet or socket or connected to a water/gas outlet, then that’s okay. That doesn’t count as being attached or connected, thus the item is a depreciable chattel.
Step 2: Is the item is an integral part of the building? In other words, if you took it away, would the building be considered incomplete or unable to function? If “No,” then it is a chattel. Hooray! If the answer is “Yes,” then the item will be a part of the building, not a chattel. Again, there is more to it. If the answer is “No,”, go to step 3. Do not pass go. Do not collect $200.
Step 3: Is the item built-in? attached? connected to the building in such a way that it is part of the “fabric” of the building? Hmmm. Good question. You’ll need to consider factors such as the nature and degree of attachment, how hard it would be to remove it (e.g., removing tiles would be difficult), and whether there would be any significant damage to the item or the building if the item were removed (e.g., using the example of tiles, probably). So, if the answer is “Yes,” then the thing/item is not a chattel.
Want to hear it from the horse’s mouth? Click here and here to read up about it on the IRD website. We also recommend reading this excellent article at GRA. It's about improvements and their deductibility.
NB: We are not affiliated with or endorsed by GRA in anyway. But they're good at what they do, and we respect them highly. Image courtesy of nuttakit / FreeDigitalPhotos.net
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!