What you can and can’t claim as an expense when buying a rental property is a hot topic of conversation. The confusion around this issue is likely inflamed by the recent changes to the rules that the IRD has quietly made without much publicity.
Below are some of the most common questions we get asked with property purchases. If your question isn’t below, get in touch with our team of property tax pros and we can help get you sorted.
Can I Claim for Legal Fees When Buying a Rental Property?
Yes. The IRD has recently accepted that their previous opinion on these fees was incorrect. You are now permitted a deduction for legal fees related to the purchase of a rental property, up tot he standard maximum of $10,000.00 in any tax year.
You can also claim for fees related to taking legal action to recover unpaid rent.
You can only claim the legal fees for selling a property if you are in the business of providing residential rental accommodation. This means that your intention needs to be clearly long-term rental and not speculative.
Can I Claim for Due Diligence When Buying a Rental Property?
Mostly, yes. This is a grey area as it depends entirely on the intentions for the property and the outcome of negotiations. Builders and LIM Reports are always treated as capital expenditure and so are not deductible. However, other due diligence costs might be.
If you go ahead and purchase the property and then operate it as a rental, then the due diligence is most likely deductible. The deduction depends on whether the due diligence is in the form of advice, coaching and support with regards to the management of the property as an income generating rental. Due diligence with regards to financing, general property education and leveraging advice would not be deductible. These items are considered more to do with the acquisition of the property than the generating of income from it and so they are deemed to be capital in nature.
Can I Claim for Builders Reports When Assessing a Rental Property?
No. Builders reports are considered to be capital in nature and so are not deductible. This is because the builders report is solely for the purchase and not for the ongoing rental income generation. A deduction is allowed only when there is a direct link to the income generation.
Can I Claim for LIM Reports When Assessing a Rental Property?
No. LIM Reports are directly related to the purchase of the property, not generating income from it. An income tax deduction is only available for expenses incurred in the generation of the taxable income. LIM Reports are therefore deemed to be a capital expenditure.
Can I Claim for a Registered Valuation When Buying a Rental Property?
Yes. But only if the cost is for the express purpose of securing finance for the rental property. You can’t claim for valuations that are for insurance purposes or to help you identify a reasonable offer/ purchase price. Many banks require a registered valuation before they will finalise your mortgage so it helps that this is a tax deductible cost.
Can I Claim for my Travel Expenses to View a Rental Property?
No. If you have to drive, fly or sail to an open home that cost is unfortunately not deductible.
Once you own the rental property, you can claim for your travel costs to inspect the property, you just can’t make the same claim for inspecting it before you’re the landlord.
However, some costs of acquisition, like loan fees, can be deducted.
Can I Claim for Loan Fees When Financing a Rental Property?
Yes. Fees for arranging the financing of a rental property are deductible.
This can be confusing as the purchase price itself and most of the associated costs (like the capital portion of the loan) are not deductible. However, there is specific guidance from the IRD allowing the deduction of loan fees.
Can I Claim for Finders Fees Paid for a Rental Property?
No. This type of expense is deemed to be capital in nature and therefore not tax deductible. Finders fees are a cost associated with the acquisition of the property rather than the operation of the property as a rental. As such, they have no direct link to the generation of taxable income.
Capital expenditure such as this can be claimed as a deduction against any tax on capital gains, such as a CGT/ Bright Line Test tax, so it still helps to keep a record of it.
Can I Claim for Property Mentoring, Coaching or Education?
Mostly, yes. This is a bit of a grey area and depends on the specific program and nature of the advice and support.
Property investment education that is centered on how to find and finance a property is likely to be considered capital in nature. This is because this type of education is not directly related to the generation of taxable income. Rather its advice for the accumulation of wealth and the leveraging of any existing wealth.
Property investment advice, mentoring and education that is focused on managing your rental, setting and maximising rents and dealing with ongoing property issues would be deductible. This type of expense is directly related to the income you generate from the rental property.
Most often, the costs of chatting with your MBP Advisor are totally deductible. If you’re on one of our rental property packages then chatting with us about your rental portfolio is totally FREE. So reach out to your advisor today for tailored, expert advice and support. Don’t have and advisor? Get one today by reaching out to the team at MBP.
Note: The above information is general in nature and accurate at the initial time of publication. Every effort is made to keep this page updated but you should always get specific advice tailored to your unique situation, so don’t hesitate to get in touch with our team of property tax professionals.