What Landlords Need To Know about Tax and Depreciation?

Landlord Tax & depreciation

When it comes to legislative updates or meeting the Healthy Homes Standards, our property managers have you covered. Equally important is for landlords to have a good sense of the tax and depreciation implications of property investment. In our latest Property Matters Show, our in-studio guest, Aman Chand, from Belmont Partners answered the following frequently asked questions by landlords about tax and depreciation.e

Explain the changes to tax as a direct result of COVID-19?

In respect to property, the changes include “measures to support commercial landlords” and “low-value asset threshold”

Measures to Support Commercial Landlords

The tax depreciation rate on all buildings with a useful life of 50 years or more was changed (from 2%) to 0% from the 2011-12 income year (for most taxpayers, this was from 1 April 2011).

This was based on data (between 1993 and 2009) which showed buildings have been increasing in value and therefore the 2% depreciation was not appropriate. Property values were a hot topic back then as it is now. 

However, as a direct result of COVID-19, from the 2020-2021 income year (for most taxpayers, this means from 1 April 2021), commercial buildings can be depreciated (at 2% DV or 1.5% SL).

Residential buildings are not part of these depreciation changes. This is because the Government perceived that residential property depreciated at a much slower rate which has perhaps been confirmed with recent record sale prices.

Whether or not taxpayers are able to claim depreciation on residential property used for short-stay accommodation depends on if the property qualifies as a residential or commercial building. This is a complex area and therefore we recommend seeking advice.

Low-value Asset Threshold

The low-value threshold for immediate expensing of assets was increased to allow the immediate expensing of assets purchased on or after 17 March 2020 where the cost price is less than $5,000.

The low-value threshold has only been increased to $5,000 until 16 March 2021 to encourage taxpayers to keep investing throughout the COVID-19 pandemic.

For assets purchased on or after 17 March 2021, this threshold will be permanently increased from the prior level of $500 to $1,000.

There are however some exceptions, that is, an immediate deduction for low-value assets is not available where:

  • Multiple assets with the same depreciation rate are acquired from the same supplier at the same time and the total cost (and not per asset cost) exceeds the low-value threshold. For example, purchasing two heat pumps at once costing $3,000 each would exceed the low-value threshold of $5,000. The total cost of $6,000 must therefore be capitalised and depreciated (at 20% DV or 13,5% SL). If the same purchase was done over two separate days, the amount per transaction is below the low-value threshold of $5,000 and so an immediate deduction would be available.
  • The asset being acquired forms part of another item of depreciable property. For example, insulation (below the low-value threshold of $5,000) which becomes part of the depreciable residential building. Although a residential building carries a nil depreciation rate, this is still considered to be depreciable property.

How can property investors reduce the Healthy Homes Standards compliance cost, using new tax changes?

Landlords have until 1 July 2024 to comply with the healthy homes standards for heating, insulation, ventilation, moisture ingress, and drainage, and draught stopping.

With the introduction of a temporary low-value asset threshold of $5,000 (from 17 March 2020 to 16 March 2021), now is a good time to think about getting the required work completed on your investment properties.

This is because you will be able to obtain a full deduction for assets up to the value of $5,000 (subject to the exceptions), rather than depreciating the asset or obtaining no deduction at all.

A permanent low-value asset threshold of $1,000 will apply for assets purchased on or after 17 March 2021 which provides landlords the ability to immediately deduct relevant costs of less than $1,000 incurred after 16 March 2021.

Inland Revenue has also issued a “question we’ve been asked” referred to as “QB 20/01:Can owners of existing residential rental properties claim deductions for costs incurred to meet Healthy Homes standards?” which provides good guidance on the tax treatment of costs associated with healthy home standards.

Would it make sense for owners to get their homes compliant to make use of the rule?

It makes perfect sense for landlords to comply with the healthy homes standards with the introduction of the new temporary (from 17 March 2020 to 16 March 2021) and permanent (from 17 March 2021) low-value asset thresholds of $5,000 and $1,000 respectively. Meeting the healthy home standards should not be driven from a tax perspective. This is a legislative requirement that should also improve the value of the property.

Do you have any advice for property owners around tax and depreciation in general?

The depreciation rate on residential properties remains at 0%. However, chattels can be depreciated, and Inland Revenue has provided a useful list that outlines the chattels that can be depreciated including both the DV or SL depreciation rate.

Look for “residential rental property chattels” under “find all assets in a single industry category” in Inland Revenue’s “depreciation rate finder”.

Be careful to note the exceptions for claiming an immediate deduction for low-value assets (as noted above). Also, refer to Inland Revenue’s “QB 20/01 Can owners of existing residential rental properties claim deductions for costs incurred to meet Healthy Homes standards?” (refer to the link noted above).

What about ring-fencing residential property rental losses?

The most important tax issue, as many would be aware, is the new ring-fencing of residential property rental losses which applies from the 2019-2020 income year (for most taxpayers, this means from 1 April 2019).

In general terms, residential property tax losses (the losses) will no longer be able to be set off against other income. The losses can however be carried forward and offset against future residential rental income and taxable income on the sale of residential land (for example, taxable gain under the bright-line rules). Any remaining unused losses will generally continue to be ring-fenced.

It is recommended that landlords seek advice, in particular, where landlords have multiple rental properties and may wish to say offset losses for one residential property against income from other properties

What happens after the end of March for owners wanting to claim tax?

Most accounting practices will issue an annual tax return questionnaire to meet your tax compliance requirements.

In respect to rental properties, obtain your “year-end statement” if you have engaged a property manager. Remember to collect other details such as “interest”, “insurance”, “rates” and any other expenses that are not included in the “year-end statement”.

With the ring-fencing of residential property rental losses in play, it may also be timely to consider debt and ownership structuring. We recommend seeking advice, in particular with the restructuring of ownership where the application of the bright-line test will need to be considered.

In general, terms, where residential land is disposed of within the relevant period after acquisition then the bright-line test may apply to tax any capital gain if it is sold within:

  • 2 years of acquisition & the acquisition date is on or after 01 Oct 2015; or
  • 5 years of acquisition & the acquisition date is on or after 29 Mar 2018.

For an average owner with 1 or 2 properties, what can they do to save money by being savvy with their accounting?

  • Invest time in maintaining good records (manually or software if cashflow permits such as Xero which is certainly quicker).
  • Understand types of allowable expenses and deductions, which will assist with end of year discussions and calculations.
  • Partner with proactive property managers and chartered accountants who should be updating you on legislative changes, planning, and so on.

Many investors use property managers who provide fantastic end of financial year accounts making the accountant's job much easier. This saving in the accountant's fee could be offset against the cost of having the property managed. Do you see having your property managed as a positive step in an investor's journey?

The end of the year report from property managers is very useful for accountants. Property managers are a personal choice but having people with expertise and the ability to take care of the day-to-day aspects of running your property is definitely a positive. 

Interested in the services offered by Belmont Partners? Then get in touch!

Belmont Partners is a discrete and trusted chartered accounting practice. They provide the following expert services in addition to accounting and business advisory services. 

  • Specialist tax compliance and consulting services by Aman Chand.
  • Specialist independent family office, trust, and trusteeship services provided by Sharon Norman. 
  • Independent directorship and corporate governance services by Colin Theyers (who operates separately as Theyers Governance but has a close working relationship with Belmont Partners).

This combination allows Belmont Partners to offer accounting and business advisory services with in-depth expert knowledge. We work closely with our clients many of which are complex groups and high net worth individuals. 

For all other questions or queries, get in touch with your property manager.