You must pay tax on your rental income. This could be from renting out a house, land, caravan, sleep-out, building, holiday home or room in your own home.
Under the actual cost method you deduct allowable rental expenses from the gross rental income. What's left is your taxable rental income.
Check if you use the actual cost method for your rental property
The actual cost method might not apply to your rental property. If you're not sure, check what to do for your type of property:
How to apply the actual cost method
When you're using the actual cost method you need your:
- gross rental income
- allowable rental expenses.
Gross rental income
Gross rental income includes:
- rental payments from tenants, eg $400 per week (this is the rental payment before you've deducted any management fees)
- rental payments from short-term guests, eg $165 per night (this is the rental per night before you've deducted service fees)
- fees paid to agencies like Airbnb and property management companies
- payments from the Tenancy Board for damages or rent arrears
- depreciation recovered.
Allowable rental expenses
Your allowable rental expenses are those you've spent to earn rental income.
Under the actual cost method you can deduct your allowable rental expenses from your gross rental income. Not all expenses are deductible. They can be either:
- fully deductible from your rental income if you've spent them for income-earning use
- non-deductible if they're spent on private use
- apportioned or split for shared rental expenses. You'll be able to deduct some of these from your gross rental income.
You can only claim the expenses for the time you rented out your property or it was available to rent. For example, you live in the property for 3 months of the year and rent it out for 9 months. In this case, you'll only claim the fully deductible and shared rental expenses for those 9 months.
Working out your expenses using the actual cost method
When you're using the actual cost method you'll deduct allowable rental expenses from your gross rental income. After the deduction you're left with taxable rental income.
Sometimes your allowable rental expenses are more than your gross rental income. When this happens you're left with excess deductions. You'll have to carry these into the next tax year and deduct them when you earn residential income.
You cannot use the excess deductions against your other income, for example salary and wages.
There are rules about what you can do with excess deductions when you have more than one residential rental property.
Shared rental expenses
When you have shared rental expenses you can only partly deduct them from your gross rental income. It's because they're not all for income-earning use.