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 regular tax rules you deduct allowable rental expenses from the gross rental income. What's left is your taxable rental income. This is the actual cost method.
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, for example $400 per week (this is the rental payment before you've deducted any management fees)
- rental payments from short-term guests, for example $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:
- 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 generally claim the expenses for the time you rented out your property and it was available to rent, if your property is one of the following types.
- 100% an investment property.
- A mixed-use asset that is not under the mixed-use asset rules.
- A property, or part of it, used for short-term or long-term accommodation also used privately (as long as you can provide evidence it was not used privately when it was available to be rented).
You can only claim the expenses for the time you rented out the property, or part of it, if it is not one of the above types.
You cannot claim the expenses for the time you stay in the property. 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.
If you have boarders, home-stay students or flatmates, you can only claim expenses for the time the room is rented.
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 cannot use the excess deductions against your other income, for example salary and wages. You may have to carry these into the next tax year and deduct them when you earn residential income.
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.