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From Short To Long-Term Rentals

Matthew Gilligan explains the tax implications of converting short-term holiday lets into long-term rentals.

By: Matthew Gilligan

30 September 2020

With New Zealand’s borders likely to be closed for some time, a number of clients who have rented properties on a short-term basis (for example, via Airbnb) are converting those properties to long-term residential tenancies. What are the tax implications?

Income Tax

Whether a property is rented out on a short or long-term basis, income received is taxable. However, there are differences when claiming expenses and losses.

Property rented on a short-term basis can be classified as a “mixed-use asset”.

• One example of a mixed-use asset is your classic holiday home that is used privately on occasion, rented out on occasion and frequently vacant.

• If a property is classified as a mixeduse asset, not all of the expenses are deductible. There are specific rules that scale back the expenses able to be claimed.

• Further, there are “loss quarantining” rules that can prevent tax losses from being offset against other forms of income. These rules apply to mixed-use assets only if the rent falls below 2% of the value of the property.

• A property that is rented on a short-term stay basis, but not used privately, will not be a mixed-use asset. Expenditure in relation to these properties is fully deductible, although the residential loss ring-fencing rules may still apply – this is a murky issue.

Once a property is rented out long-term to residential tenants, the residential loss ring-fencing rules apply, which prevent you from offsetting tax losses against other forms of income. They apply to all residential properties, and unlike the loss quarantining rules for mixed-use assets, apply irrespective of the quantum of income.

GST

If you are registered for GST there can be significant implications of changing a property from short-term stay to longterm residential rental use.
• GST can apply to short-term stay accommodation either voluntarily, or compulsorily if your annual turnover is over $60,000.
• If a property is in the GST net and then converted to long-term residential use, there are adjustments required for GST purposes.
• The quantum and timing of these adjustments differ depending on the circumstances of the property owner and their plans for the property.

For example, you may need to deregister for GST. The impact is significant because de-registering triggers a deemed sale at market value, ie, GST to pay on current value. Usually if you cease a taxable activity for a 12-month period you are required to de-register (and face this deemed sale). However, IRD has announced a Covid-related concession whereby you can remain GST registered if you expect to resume the short-term stay activity within 18 months (but there are conditions attached).

If the change in use is temporary only, you can avoid de-registering and triggering this deemed sale. However, you will likely need to apply the complex change in use adjustment rules, which see you paying GST back based on the period rented short stay versus long stay, as a proportion of the total period owned. This causes you to make an adjustment on a “period by period” basis, repaying a portion of GST on the original cost at the end of each financial year. Confused? Don’t worry, you can (and probably should) use an accountant for this, to avoid issues with IRD.

One thing to be clear on when renting a property to a residential tenant is that you do not charge/pay GST on the rent. I say this because I have seen a few accountants over the years making their clients do so. Rent from long-term residential tenancies is always exempt from GST — even when you are building houses for re-sale. If you are paying GST on rental income, then you should seek an alternative opinion, or challenge your tax practitioner on this point.

Summary

There are consequences from both income tax and GST perspectives in converting a property from short-term to long-term residential use, and it is best to get specialist advice. Talk to us at www.gra.co.nz if you need help.

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