If you have rental income, regardless of whether you’re renting out land, a house, a caravan, a room, or a building, you can’t escape paying tax on your profits, but how much tax should you be paying? And what method should be used to figure this out?


Tax based on property type


Firstly, you need to know your rental property type to determine the methods you can use in working out your tax obligations.


To go all accountant on you – the actual cost method is used in working out your rental income for tax purposes. You just need to deduct your “allowable rental expenses” from your “gross rental income” and the difference would be your “taxable rental income”, or “rental profits”.


If you’re more of a visual person: 


Gross rental income – Allowable rental expenses = Taxable income


To use the actual cost method, you just need to be armed with your gross rental income and allowable rental expenses. Say what? Don’t worry, we got you!


Here’s how to get them:


Your gross rental income includes


         
All rental payments from tenants, which is the total amount before you deduct any management fees from it

         
All rental payments from short-term guests, which is the total amount before you deduct service fees

         
Fees you pay to property management agencies or Airbnb and the likes

         
Tenancy Board payments for damages or rent arrears

         
And recovered depreciation


Allowable rental expenses


Your allowable rental expenses, on the other hand, are those you spend to earn your rental income. The good news is you can deduct these expenses under the actual cost method! The bad news is that not all expenses are deductible – some may be fully deductible, non-deductible at all (bugger) or apportioned or split for shared rental expenses.


You can deduct shared rental expenses partly from your gross rental income as these are not all for income use. An example of a time when rental expenses would be apportioned, is If part of your rental property was used for personal use (ie: living in the studio of the rental property – assuming expenses are shared among the two sections of the home). Where applicable, don’t forget to split your private and for-income use expenses if they aren’t combined on the same account.


You can claim all expenses for the entire period your property is available to be rented, as long as it’s 100% an investment property or a mixed-use asset that’s not under the mixed-use asset rules.


Mixed-use property


If your property is not 100% for-income or is a mixed-use asset under the mixed-use asset rules, you can only claim expenses for the period you rented out your property, not the whole time it was open for rent.


You can’t claim the expenses for the period the property was used privately and if you have flat mates, you can only claim expenses for the period the room is rented.


As mentioned above, you use the actual cost method by deducting allowable rental expenses from your gross rental income and you’ll be left with your taxable rental income.

If your allowable rental expenses happen to be more than your gross income, you have a residential rental loss for the year, which you can carry into the next tax year and deduct from any future residential income (including income from different residential rental properties).


Property accounting


It’s always best to get advice from a chartered accountant before jumping into preparing your own tax return. As although it may sound quite straightforward, there’s a few tricks of the trade that you need to make sure you don’t miss when calculating your taxable income – in the long run, it could save you thousands in tax. Give us a buzz and our property experts will get it sorted.

 

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