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Landlords' Top 10 Tax Deduction Mistakes

For the average kiwi landlord, tax deductions are one of the easiest taxation pitfalls – which costs are deductible? It’s not always simple and it’s not always the common sense answer. Amy Hamilton Chadwick asks three accountants who specialise in property investment which mistakes are made most often.

By: Amy Hamilton Chadwick

1 March 2016

1 Cutting Corners On Advice

Bargain basement accounting packages and DIY kiwi ingenuity may seem like a great way to save money, but you’ll never see how much money you’re missing out on. Trying to do your own taxes on your properties is a serious mistake – tax experts spend hours every week keeping up to date on the latest legislation and interpretations; there’s no way you can come close to their exacting standards.

Almost as frustrating is seeing people who think they’re getting a cheap deal by paying only $800 instead of $1,600 for an end-of-year accounting package – only to miss out on tax refunds of $5,000 to $10,000, says Janet Xuccoa, a partner and Trustee Services Director at GRA and the author of Money Secrets 101. Subpar advice can lead to opportunities for deductibility being overlooked – $300,000 in debt loaded on the family home instead of the rental, for example, means you’re missing out on almost $6,000 in tax deductions on the interest payments.

“Cheap can turn out to be expensive in the long run,” she says. “I’m always surprised that when we give people a price they will sometimes tell me it’s too high, but they never ask ‘What do I get for that?’”

2 Assuming All Interest Payments Are deductible

“Some people think they have a god-given right to claim on all the interest they incur,” jokes Mark Withers, partner at Withers Tsang & Co and author of Property Tax – A NZ Investors’ Guide. He says there must be a nexus between the loan and the income-earning capacity of the property: it’s not enough that you’ve borrowed to buy the rental, the loan needs to be tied to that specific property.

It sounds straightforward, but it’s surprisingly common for investors to make costly mistakes. For example, by repaying a rental property loan then drawing it down again to fund a private purchase – the interest on that loan is no longer tax deductible. Others calculate their repayments assuming they’ll get their tax back, forgetting that there’s no deductibility on any repayments of the principal.

“The difficulty is once people have fallen into the trap it’s hard to fix,” says Withers. “But if they talk to us first we can come up with an easy way through.”

3 Claiming For 'Maintenance' When It's Really Improvements

Bought a ‘do-up’ and spent $20,000 getting it to a reasonable standard before renting it out? That is not tax deductible maintenance expenditure. Nor can you claim a tax deduction on putting the house back in order after a tenancy and before you sell it, despite the fact the tenants have caused the damage. You can only claim repairs and maintenance costs if they were carried out when the tenants were living there or the house was available to rent.

“No rent, no deduction,” says Withers, adding that this is the number one issue that the IR has with property investors and any issue will often trigger a full audit – he estimates that 90% of audits are sparked by incorrect claims for maintenance. For that reason, you should keep receipts for the money you spend on repairs and maintenance.
“Your accountant doesn’t need to see the receipts,” says Martin Dreyer, director at D and D Financial Consultants and a property taxation expert, “but costs for repairs and maintenance can be significant and if Inland Revenue knocks on your door to do an audit you’re technically supposed to have a receipt.”

4 Trying To Claim For Every Little Item

It’s common to see clients “go over the top”, says Dreyer, trying to claim for food, personal items and home office expenses. If you have only a small portfolio, and especially if you have a property manager looking after it for you, it’s unrealistic to imagine you’re spending all day in your home office.

“Maybe on a large business, where you had 20 properties,” he says, “but if you’ve only got one rental the Inland Revenue might wonder what’s happening in that office and start looking further.”

Another mistake that falls into the category of ‘wishful thinking’ is attempting to claim on the ‘cost’ of your own labour. Mowing the lawn or installing the insulation yourself is commendable, but it’s really not worth claiming on the theoretical cost of your work, says Dreyer. If you do decide to pay yourself for the time you spend working on rental property improvements, you’ll also need to declare that as income and be taxed on it accordingly – leaving you cash neutral but having increased your pile of paperwork.

5 Putting Your Structures In The Bottom Drawer

Canny property investors usually operate several different types of entities. These may include personal ownership, look-through companies, limited companies and trusts. The wrong structure can cost you thousands of dollars in additional tax payments, while the right structure can maximise your profits and make the difference between positive and negative cashflow.

But the right structure for your properties now won’t necessarily always work. Life events, business changes, new legislation or banking criteria: “When events like this crop up, existing structures need to be checked to ensure they are still appropriate and optimal. Time and again, however, people adopt a bottom-drawer approach,” says Xuccoa. “They create structures, put them in the bottom draw and forget them.”

Inland Revenue will look for anomalies in your structures in its hunt for undeclared property profits. It does this partly by inspecting your tax returns but also by examining property owned by look-through companies if you’re living there yourself, warns Withers: “They’ll trace that by looking at where mail is being sent, even their own [IR’s] mail.”

6 Moving Money And Properties Around

All those entities might have different names, but it’s all your money, right? Yes, but you really can’t move money, shares or properties around willy-nilly.

“People move shares around in their structures without understanding tax consequences. Continuity rules can be breaches; losses can be lost,” says Xuccoa. She’s also encountered clients who ask their lawyers to move property assets between entities thinking it will help them avoid paying taxes. But it’s not a lawyer’s job to check tax consequences; just because your lawyer doesn’t tell you there’s tax to be paid doesn’t mean you’ve got away with it.
Even something as minor as paying rental property expenses out of your personal account can cause headaches – “If they don’t provide the details and it hasn’t gone through the business, or it’s in cash, we won’t be aware of it and they’ll miss out on a claim,” says Dreyer.

7 Negotiating On The Assumption That You'll Get The GST Back

If you’re a GST-registered property trader, usually you’ll buy properties from non-registered owners, so you know you’ll get a GST refund. It can come as a nasty surprise to find out the vendor is also GST registered – the transaction is zero rated for GST; “When you suddenly strike someone who is registered it’s quite a problem,” says Withers.

8 Forgetting To Value And Write Off - Chattels

“When a property investor purchases an investment property, it’s very common that they forget to get a chattel valuation report done so they can’t claim depreciation,” says Dreyer. Whenever you have your property valued, get the chattels valued at the same time.
There’s also a benefit at the other end, when you’re leaving a fridge out for the inorganic collection. It’s easy to forget that old chattels can be written off and a deduction claimed.
“If you paid $1,000 for the carpet and take it to the dump, there’s no transaction to show it’s been sold or destroyed, your accountant will assume the old carpet is still there, and you’ll miss out on the deduction write-off on the old asset,” Withers says.

9 Missing Out On Mileage And Mobile Phone Deductions

Few property investors make the most of their mileage claims – to do so you need to keep a thorough record of your rental-related travel. Withers says a simple hand-written log with dates and distances will work perfectly well, or try a free app like MileIQ for your smartphone. A trip to Bunnings to buy a new smoke alarm, followed by a 10km round trip to your rental property to install it – it all adds up. And don’t forget your phone, says Dreyer: if you’re using it to contact tenants a portion of your bill will be tax deductible.

10 Claiming expenses related to selling a property It would be lovely to think the cost of advertising your property, and the sales commission for the real estate agent, were tax deductible. But no luck; those costs are generally capital in nature, says Dreyer.

Look For A Property Specialist

You may find you’ll get the best taxation advice from an accountant who specialises in property tax. If you’re shopping around for accountancy services, ask your accountant, “Do you own investment properties?”

As successful investors will tell you, a strong relationship with a great accountant is a vital part of any high-performing property investment team.

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