1. Home
  2.  / Counting the costs
Counting the costs

Counting the costs

It’s important to know the difference between repairs and maintenance and capital improvements when it comes to tax.

By: Sally Lindsay

4 March 2024

Q. My wife and I have owned a rental for 15-plus years. For the 22/23 tax year the property was not tenanted as we renovated it with a new roof, new double-glazed windows, new kitchen, carpet and paint throughout. I had expected that some/all of this would be a tax write-off (expense). My accountant gave me some advice and then changed his mind. What I would like to know is: can some of these costs be counted as an expense, and can some or all these costs be capitalised and depreciated?

A. There is no area of tax law more contentious than the distinction between capital improvements and repairs and maintenance. As per a detailed IRD statement, the first step is to identify the asset in question. From there you ask whether or not the work constitutes a replacement, reconstruction, or renewal of the asset. If it does, it is capital improvement and non-deductible. If it does not, then the next question is whether or not the work has led to a change in the character of the asset. Without further context it is difficult to reach a view on the work you have done. It is not obviously minor enough to be repairs and maintenance, nor obviously extensive enough to be capital improvement. I note that carpet is a separable asset and so any expenditure on this is capital in nature, but able to be depreciated. As to the rest of the costs, the asset will be the building and the question therefore is whether the work done is extensive enough to be a replacement, reconstruction, or renewal, or failing that, whether it changed the character of the asset. I tend to think that updating the kitchen, painting, and replacing the roof does not result in a change of character as long as there is not a great deal of upscaling. Double-glazed windows likely constitute an upgrade, but in and of themselves may not be said to result in a change in character of the building as an asset. I sense there is an argument here that the costs may be deductible, but as noted, it is a contentious area, and you need to be prepared for potential scrutiny and challenge from the IRD if claiming a large deduction. You are best to obtain advice from a qualified accountant.

– Matthew Gilligan

Q. I am confused about the bright-line test rules. Can you please explain the differences between a property bought off-the-plan compared to a completed build when it comes to selling.

A. For bright-line, a property is “acquired” on the date a binding sale and purchase agreement is entered into. The acquisition date in turn determines whether the bright-line period for the property is two, five or 10 years. Whether bright-line tax is payable is then determined by whether the property has been owned longer than its bright-line period requires. Bright-line period is generally measured from the point where the purchase is settled, and you are registered as the owner of the property through to the point where you enter a binding sale and purchase agreement to sell it. However, there are special rules for off the plan purchases when determining the bright-line period. When buying off the plans the bright-line period begins at the point the binding sale and purchase agreement is entered into rather than when the purchase is completed, and the title registered to the purchaser. This recognises the fact that there can be a significant passage of time between the signing of an agreement and the settlement of that transaction when the building must still be erected and completed before settlement can occur.

– Mark Withers

Q. I have a property with a fixed-term lease that is set to expire in a month. I am looking to sell the property and am considering giving my tenant a 90-day notice. Can I provide this notice now, which would be 30 days before the fixed term ends, and will that month be considered part of the 90-day notice period?

A.This is a question that is often the source of confusion for landlords. Yes, you can issue a 90-day notice to terminate the tenancy when there are only 30 days left in the fixed-term lease. In this situation, the tenancy is treated as if it were a periodic tenancy, and it will terminate in 90 days (60 days after the fixed-term end date). The notice to terminate the tenancy falls under section 51(2)(a) of the Residential Tenancies Act. It’s important to ensure that the notice is served correctly and includes all necessary information.

– Ryan Weir

Q. I am considering switching from long-term renting to short-term but have no experience within this area. What are the key benefits of making the jump between markets?

A.While both markets appeal to property owners for different reasons, short-term rentals utilise a dynamic pricing model where daily rates are optimised throughout the year. In comparison, long-term renting relies on fixed rental prices with little room for change. If you join a professional property management company, revenue management experts will monitor rates daily, optimising pricing around key events, holidays, entertainment, weekends, and seasons. You do not need to see 100 per cent occupancy year-round to achieve higher returns. Short-term rentals also offer more control over who is staying in your property, with bad tenants and rent arrears becoming a thing of the past. All guests are fully vetted to ensure the safety of your property and neighbours. A reputable short-term rental management company will also address any complaints surrounding noise, parties, or visitors as soon as they are made. If you are a homeowner or investor, the short-term market is highly attractive for those who wish to use their property for short periods throughout the year but still want to turn a profit when it is not in use. Property owners can block their calendars anytime for friends or family. In addition, they will not be obligated to meet Healthy Homes standards, and residential tenancy agreements will no longer apply.

– Eric Hammond

Q. We are in the middle of subdividing two existing dwellings on one title into two titles. We have a mortgage over the one property as it is. We are unsure what will happen with the lending when the new title is issued. Is it likely the bank will keep the same mortgage, but over two titles or will the mortgage need to be discharged and a new one set against each property? I have spoken with the bank and it says a specific team, which deals with these issues, will only talk with our solicitor. I don’t want to carry on with the subdivision if the bank won’t lend on the properties separately because of banks test rates, although they will create a lot more equity and LVRs aren’t an issue.

A. The bank should just allow the mortgages to be spread over the two titles as you will, in all likelihood, be improving their position by having more equity in the two properties. To be completely safe I would discuss this with your solicitor. Some banks have been handling things differently around servicing and there may be other reasons the bank have an issue.

– Kris Pedersen