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Claiming business expenses: Holiday homes - mixed-use assets

Mixed-use assets (holiday homes, boats and aircraft)

This page explains what mixed-use assets are and how tax rules apply to them. If you have a holiday home, boat or aircraft that these rules apply to, you'll need to calculate your income tax obligations differently.

The information here is for individuals, partnerships, trusts, Māori authorities and look-through companies. There are additional rules about claiming interest expenses for close companies that own mixed-use assets. These rules do not apply to companies that are not a close company.

 What excluded assets are

The rules don't apply to:

  • a residential property used for long-term rental, or
  • a business asset where the private use is minor, eg once a year, or
  • a home office, where your expense claim is based on floor area.

 When the new rules come into effect

  • From the 2013-14 tax year for holiday homes.
  • From the 2014-15 tax year for boats and aircraft.

 What mixed-use assets are

You have a mixed-use asset if, during the tax year, it's used for both private use and income-earning use, and it's also unused for 62 days or more.

The rules apply to any:

  • property, regardless of cost price or current value, and
  • boat or aircraft which had a cost or market value of $50,000 or more when you bought it, and
  • additional item or accessory relating to the asset, eg a quad bike stored at a holiday home.
Example 1

Angela owns a bach in Taupo she bought in 1998 for $45,000. During the current year, the bach was:

  • used privately for 49 days
  • rented to the public for 31 days, and
  • not used for 285 days.

The bach is a mixed-use asset.


 

Example 2

Tony has a motorboat which cost $25,000. During the 2014-15 year, he used it privately and leased it to the local swimming club. The rest of the time (259 days), the boat wasn't used.

Tony's boat isn't a mixed-use asset because it cost under $50,000.

Private use of an asset

"Private use" of your mixed-use asset means use by:

  • you, your family or associated people, whether you receive income from the asset or not
  • non-associated people if you receive income at less than 80% of market rates.

Income received for private use is exempt income and expenses for private use is not deductible. For example, rent at 100% of market value from your sister and rent at 75% of market value from your neighbour for your holiday home is all exempt income.

Private use does not include when the asset is used by you to earn income from your business, eg you drive your jet boat for a tourist.

Income-earning use

"Income-earning use" of your mixed-use asset means use by a non-associated person who pays you at 80% or more of market value.

Income-earning days include time you spend, either occupying or using the asset to:

  • repair damage to your asset, provided the damage occurred during income-earning days
  • relocate the asset, provided you're paid to do so.
Example 3

Wiremu's holiday home was badly damaged by tenants, so he spent the weekend at the property making repairs.  The two days count as income-earning days.

 

Example 4

In Tauranga, Rick owns a yacht that he hires out. In June, a company pays Rick to sail the yacht to Wellington, where it will be used to entertain overseas clients. Rick can count his trip to Wellington among his income-earning days.

 Opting out from the mixed-use assets rules

You can choose to treat income as exempt income when:

  • your income from income-earning use is less than $4,000 (excludes income for private use) for the tax year, or
  • you have quarantined expenditure.

Any income or expenses relating to your asset won't be included in your income tax return.

 Your taxable income for a mixed-use asset

You must pay income tax on any income received from income-earning use (unless you choose to keep your annual income out of the tax system, as described above). Any income from private use is exempt from income tax.

 Expenses you can claim for a mixed-use asset

Expenses from mixed-use assets fall into three categories:

Fully deductible expenses

You can claim 100% of any expense solely for the income-earning use of the asset.

For example, costs of advertising for tenants for your holiday home, costs of repairs when your boat was damaged during a charter trip.

Not deductible expenses

You can't claim any expenses for the private use of the asset.

For example, costs of a quad bike stored in a locked garage and unavailable to the general public renting your holiday home.

Apportioned expenses

If an expense relates to both income-earning use and private use, you need to apportion it using the formula below.

Apportionment formula

Expense   x income-earning days
 income-earning days plus counted days (private)

For example, interest, rates, insurance, depreciation (where applicable) repairs for general wear and tear.

Using alternatives to "days"

You can use other measures in the apportionment formula if they reflect the time use of the asset more accurately.  For example:

  • flying hours for an aircraft
  • nights for a holiday home.
Example 5 - calculating expenses for a holiday home

Peter owns a holiday home that was:

  • used by he and his family during the tax year for 42 days, and
  • rented to the public for 80 days.

For the rest of the year (243 days), the home was unoccupied.

Peter's uncle wanted to help out with costs, so he paid rent of $3,150. Rental income from the members of the public came to $12,000.

The expenses

Advertising for tenants
$ 500
General repairs and maintenance
$ 750
Repairing window (broken while the home was
rented out to the public)
$ 150
Cleaning septic tank
$ 400
Insurance (home and contents)
$ 800
Lawn mowing contractor
$ 250
Fishing licenses (for the family)
$ 250
Rates
$1,500
Mortgage interest
$ 800
Total expenses for the year
$5,400

The calculations

Peter's property is a mixed-use holiday home because it was used for private use and income earning use and it was unoccupied for 62 days or more.

His gross rental income is $12,000. The $3,150 received from his uncle is exempt from income tax.

Expenses for the home fall into all three categories

1. Fully deductible expenses (expenses relating to income-earning use):

Advertising for tenants $ 500
Repairing window (broken while the home was
rented out to the public)
$ 150
Total $ 650
2. Not deductible expenses (expenses relating to private use)
Fishing licenses (for the family) $ 250
3. Apportioned expenses (expenses relating to both income-earning and private use)
General repairs and maintenance
$ 750
Cleaning septic tank
$ 400
Insurance (home and contents)
$ 800
Lawn mowing contractor
$ 250
Rates
$1,500
Mortgage interest
$ 800
Total
$4,500
Applying the formula to the apportioned expenses:
expenses are the $4,500 of expenses that do not relate specifically to income-earning or private use of the holiday home.
income-earning days are the 80 days when income is derived from the asset, excluding days income is earned at less than 80% or from an associated person (ie, the $3,150 rent paid by Peter's uncle).
counted days are the 42 days the asset was used for private use by Peter and his family.
Peter applies the apportionment formula to the apportioned expenses:
$4,500 x 80
80 + 42
=  $2,950.82

This means Peter's expense claim totals $3,600.82 (the fully deductible expenses of $650 plus the apportioned expenses of $2,950.82).

His taxable income from his property is:

Gross income
$12,000.00
less expenses
$ 3,600.82
Taxable income
$ 8,399.18

 Quarantining expenditure if you make a loss from your mixed-use asset

If you make a loss from your mixed-use asset, sometimes you won't be able to claim the loss straightaway. Instead, you'll have to "quarantine" the excess expenditure and carry it forward to a future tax year to offset against future profits from the asset. This rule applies if your gross income from income-earning use of the asset is less than 2% of the value of the asset.

Working out the value of your mixed-use asset

For holiday homes, the current rating value of the property, or the purchase price if you bought it since the last rating valuation was carried out. Use market value if you bought it from an associated person.

For boats and aircraft, adjusted tax value (the value of the asset for tax purposes after depreciation has been deducted).

Example 6

During the 2014-15 tax year, Stephanie's yacht, valued at $250,000, earned income of $3,000 from members of her family and $4,200 from members of the public. Expenses after apportionment totalled $8,500.

The income from her family is exempt, so Stephanie's tax position is:

Gross income $4,200
less expenses $8,500
Loss $4,300

She works out that 2% of the value of the yacht is $5,000.

As Stephanie makes a loss, and her gross income is less than $5,000, she can't claim the loss in the 2014-15 tax year. She has to quarantine the excess expenditure of $4,300 and carry it forward to offset against future profit from the yacht.

Alternatively, Stephanie can elect to opt out and treat the $4,200 as exempt income and claim no deduction for the $8,500 expenses. She doesn't include anything in her 2015 tax return and no loss is carried forward.

Carrying forward your quarantined expenditure

If you have quarantined expenditure to carry forward, you can deduct it in the following tax years against income from the same asset.

However, there are three exceptions to this rule.

If you make a ... then ... and ...
further quarantined loss from your mixed-use asset the following tax year your quarantined expenditure can't be deducted that year you add the loss to the quarantined expenditure, and the combined amount is carried forward to the following tax year.
profit from your mixed-use asset in the following tax year that is less than the amount of the quarantined expenditure carried forward
  • you get a deduction for your quarantined expenditure equal to the amount of your profit, and
  • your taxable income from the mixed-use asset will be "zero"
you carry forward the excess quarantined expenditure to the following tax year.
further loss from your mixed-use asset that is not a quarantined loss (income earned is greater than 2%) your quarantined expenditure can't be deducted that year the loss for the year is allowed but the amount of quarantined expenditure is carried forward.

 

Example 7

Stephanie (from Example 6) has quarantined expenditure of $4,300 carried forward from the 2014-15 tax year.

In the 2015-16 tax year, Stephanie earned gross income of $10,000 from her yacht. Her expenses after apportionment came to $7,500, giving a profit of $2,500.

Stephanie can deduct some of her previous quarantined expenditure and again has an amount to carry forward:

Gross income
$10,000
less expenses
$7,500
profit
$2,500
less deduction for quarantined expenditure
$2,500
Taxable income
0

In the 2016-17 tax year, Stephanie earned gross income of $12,000 from her yacht. Her expenses after apportionment came to $18,000, giving a loss of $6,000. The loss of $6,000 is not quarantined because the gross income exceeded the 2% tax value of the yacht.

Stephanie cannot deduct her previous quarantined expenditure and again has an amount to carry forward:

Gross income
$12,000
less expenses
$18,000
loss
$6,000
less deduction for quarantined expenditure
$0
Taxable loss to be offset against other income for the 2016-17 year
$6,000
Quarantined expenditure
Total carried forward from 2014-15
$4,300
less deducted 2015-16 tax year

$2.500

less deducted 2016-17 tax year
$0
Carried forward to 2017-18 and future years
$1,800

Mixed-use assets that are not subject to the quarantine rules

If the amount of income you earn from the income-earning use of your asset can't be separately identified, the quarantine rules don't apply to you.

But the rules will apply if:

  • there's income from income-earning use you can identify, and
  • it's greater than 80% of the total income-earning use.
Example 8

Ingrid, a Canterbury farmer, owns a helicopter she uses to check on livestock.  The helicopter is also used privately. Because Ingrid can't say for sure how much of the farm's income relates to her use of the helicopter, the quarantine rules don't apply to her.

However, the other mixed-use asset rules will apply. For example, Ingrid will still need to apportion her expenses.

 

Example 9

Another Canterbury farmer, Max, also uses a helicopter to keep an eye on his livestock as well as for private use.  But at other times, he uses the helicopter to hunt deer on his property to sell as part of his business.

Over the tax year, the helicopter was used:

  • 10 hours to check on livestock
  • 90 hours for hunting deer.

Max can accurately work out how much income he makes from deer hunting.

Because the helicopter's deer-hunting use is over 80% of its total income-earning use, the quarantine rules apply to Max.

 When a mixed-use asset is purchased or sold during the year

When an asset is purchased or sold part-way through a tax year this can affect two of the calculations:

  1. the 62 days the asset is unused, to determine what mixed-use assets are
  2. the 2% of gross income to determine quarantining expenditure if you make a loss from you mixed-use asset

In both the examples below "days" is the number of days in the year you have the asset.

Example 1 - 62 days non-use of the asset

To determine what mixed-use assets are the asset must be unused for 62 days or more in the tax year. When the asset is purchased or sold part-way through the year the 62 days is reduced using the formula:

days x 62

   365

A holiday home is purchased on 1 October and used for both private and income-earning use through to 31 March, a period of 182 days. Of those 182 days it is not used for 45 days

The non-use days are calculated:

(182 days) x 62
   365
=  30.91 days
The home is a mixed-use asset for those six months because it is used privately and to earn income, and is not used for more than 30.91 days.

 

Example 2 - Quarantining expenditure if you make a loss

A loss from a mixed-use asset is quarantined and carried forward when the gross income derived from the asset is less than a threshold 2% of the cost or value of the asset.

When the asset is purchased or sold part-way through the year the 2% threshold is reduced using the formula:

days x 62

   365

A charter boat is purchased on 21 August and used for both private and income earning use through to 31 March a period of 223 days.

The percentage is calculated:

(223 days) x 2%
     365
=  0.0122191%

As at 31 March the boat has a written-down book value of $250,000 and incurred a net loss. If the gross income is less than $3,054.77 ($250,000 x 0.0122191 = $3,054.77) the loss is quarantined for that year.

Note: The number of days for non-use of the boat is 37.87

(223 days) x 62
     365
=  37.87 days

 Calculating input tax when you're GST-registered

As an owner of a mixed-use asset you must calculate your GST input tax deductions in a similar way you would calculate expenses allowed as a deduction.

Find out how to calculate the amount of input tax is when you're GST-registered

 Find out more

Use the mixed-use assets calculator 
Read the Special report on mixed-use assets on our Policy Advice Division's website
Read our mixed-use assets factsheet Tax rules for holiday homes (IR1021)
Find out about Managing a rental property