Like many first-home buyers, I've had to bring in a flatmate to help pay the bills. With the tax year ending, I'd like to share how taxes apply to this situation as few people seem to be aware. If you do not report the rental income or apply the often-misquoted tax-free threshold of $222 pp p/w, you may actually be leaving money on the table.
Anyone renting part of their main home must pay tax on rental profits, the $222 pp p/w threshold is just a standard deduction that the IRD provides for boarders (modelled on estimated expenses). The tax treatment of boarders and flatmates is the same, you must pay tax on profit after you deduct expenses. If the apportioned expenses exceed the rental income, you can reduce your taxable income and claim tax back. The residential ring-fencing rule does not apply to your main home. You can also deduct 100% of the interest (apportioned to the income) as the interest limitation rules also don't apply.
This is all set out in this IRD document - with handy examples to help you understand how to apportion expenses and deduct chattels. It is easy enough to do but will take you some time to set up. You shouldn't need an accountant to do it.
On a technical note, you declare the net income in MyIR through the "other rental income" category on your IR3 (you can attach a supplementary IR3R that sets out your numbers). This prevents the system from automatically applying the ring-fencing rule and carrying forward the rental loss.
Thanks again to u/lsohtfal who pointed this out to me.
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I was asked by @bobbyrexxy2 to provide an example:
Here are our assumptions:
((Tenant Exclusive) + (50% of the shared area)) divided by (Total floor space).
((20)+(0.5*40))/80 = 50%.
This means that you can apportion 50% of shared expenses to the rental income.
Table One: Mixed Expenses apportioned by floor space calculation
Expenses
Total Cost
Deductible
Mortgage Interest
$45537
$22748.50
Body Corporate Fees
$5500
$2750
Rates
$300
$1500
Sub Total Deductible
$27018.50
You can also claim deductions for 'Repairs and Maintenance', 'Other Expenses’, and 'Depreciation'. I've used the same headings as the IR3R form. Note the apportionment of these costs defaults to 50% to reflect the shared private and business use. This number matching our floor space calculation is a coincidence. However, where the actual use of the asset can be clearly demonstrated, an alternative basis may be adopted if it reflects a reasonable basis for apportionment i.e. the portable heater coming up.
Firstly let's deal with low value assets (less than $1,000). The IRD allows shared low value assets to be treated as an 'Other Expense' and written off in full in the first year. Remember everything is deductible even your cutlery. Where you haven't purchased the item (or was previously for private use only), you can provide an estimated market value. You are required to be able to justify this by showing TradeMe listings for example.
Table Two: Other Expenses apportioned by business use
Other Expenses
Total Cost
Business Use
Deductible
Portable Heater (for tenant's room)
$130
100%
$130
Flash toaster
$250
50%
$125
Not so flash microwave
$100
50%
$50
Sub Total Deductible
$305
Note: While I haven't demonstrated how to account for 'Repairs and maintenance' you treat this the same as above.
It's time for 'Depreciation". You have to depreciate assets over $1,000 over multiple years. I prefer to use the Diminishing Value method because I don't intend to have a flatmate long-term and this method allows you to write off the value quicker.
For the first line item let's assume that you had a valuation done before settlement which valued the existing chattels i.e. carpets and curtains, but did not provide a specific breakdown. Use the online Depreciation rate finder and calculator to look up the specific asset class and plug in your values and it calculates it all for you.
Table Three: Depreciation apportioned by business use
Depreciation
Total Cost
Total Deprecitated
Business Use
Deductible
Closing Value
Existing Chattels (default class - 40% DV)
$1000
$4000
50%
$2000
$6000
Washer Dryer (30% DV)
$1200
$360
50%
$180
$840
Living Room Furniture (20% DV)
$2000
$400
50%
$200
$1600
Sub Total Deductible
$2380
Now that we have calculated our 'Expenses', 'Other Expenses', and 'Depreciation', we put it all together to calculate our Net Rental Income.
Table Four: Net Rental Income Statement
Income: $18200
Expenses: $27015.50
Other Expenses: $305
Depreciation: $2380
Net Rental Income: ($11503.50)
Congratulations. You've made a loss.
This should demonstrate that it's easy to be in a situation where you are making a loss from renting a room in your house to a tenant. Once you've got this number you add it to your IR3 as 'Other rental income'. The rental loss will reduce your overall taxable income and IRD will automatically calculate your refund.
As a rule of thumb, you'll get back (the loss) x (marginal tax rate). For example, if you had a marginal tax rate of 33% using these numbers you'd get approximately $3800 back.
If you wish you had known this sooner, don’t worry! You can go back and amend previous years' returns with minimal fuss. Just call the IRD and tell them that you need to amend your return to declare other rental income. You may have to ask them to go away and read QB 23/08 so that they can figure out what you’re trying to do.
Anyone renting part of their main home must pay tax on rental profits, the $222 pp p/w threshold is just a standard deduction that the IRD provides for boarders (modelled on estimated expenses). The tax treatment of boarders and flatmates is the same, you must pay tax on profit after you deduct expenses. If the apportioned expenses exceed the rental income, you can reduce your taxable income and claim tax back. The residential ring-fencing rule does not apply to your main home. You can also deduct 100% of the interest (apportioned to the income) as the interest limitation rules also don't apply.
This is all set out in this IRD document - with handy examples to help you understand how to apportion expenses and deduct chattels. It is easy enough to do but will take you some time to set up. You shouldn't need an accountant to do it.
On a technical note, you declare the net income in MyIR through the "other rental income" category on your IR3 (you can attach a supplementary IR3R that sets out your numbers). This prevents the system from automatically applying the ring-fencing rule and carrying forward the rental loss.
Thanks again to u/lsohtfal who pointed this out to me.
----------//----------
I was asked by @bobbyrexxy2 to provide an example:
Here are our assumptions:
- Rent of $350 per week for the full year.
- Total floor space 80m2: Landlord Exclusive 20m2, Tenant Exclusive 20m2, Shared 40m2.
- $625k mortgage at 7.39%: $998 mortgage per week: Total interest cost in Year 1= $45,537.
- Insurance is included in body corporate fees of $5.5k. Rates: $3.5k.
- You purchased the home, moved in, and brought chattels on 1 April 2023.
((Tenant Exclusive) + (50% of the shared area)) divided by (Total floor space).
((20)+(0.5*40))/80 = 50%.
This means that you can apportion 50% of shared expenses to the rental income.
Table One: Mixed Expenses apportioned by floor space calculation
Expenses
Total Cost
Deductible
Mortgage Interest
$45537
$22748.50
Body Corporate Fees
$5500
$2750
Rates
$300
$1500
Sub Total Deductible
$27018.50
You can also claim deductions for 'Repairs and Maintenance', 'Other Expenses’, and 'Depreciation'. I've used the same headings as the IR3R form. Note the apportionment of these costs defaults to 50% to reflect the shared private and business use. This number matching our floor space calculation is a coincidence. However, where the actual use of the asset can be clearly demonstrated, an alternative basis may be adopted if it reflects a reasonable basis for apportionment i.e. the portable heater coming up.
Firstly let's deal with low value assets (less than $1,000). The IRD allows shared low value assets to be treated as an 'Other Expense' and written off in full in the first year. Remember everything is deductible even your cutlery. Where you haven't purchased the item (or was previously for private use only), you can provide an estimated market value. You are required to be able to justify this by showing TradeMe listings for example.
Table Two: Other Expenses apportioned by business use
Other Expenses
Total Cost
Business Use
Deductible
Portable Heater (for tenant's room)
$130
100%
$130
Flash toaster
$250
50%
$125
Not so flash microwave
$100
50%
$50
Sub Total Deductible
$305
Note: While I haven't demonstrated how to account for 'Repairs and maintenance' you treat this the same as above.
It's time for 'Depreciation". You have to depreciate assets over $1,000 over multiple years. I prefer to use the Diminishing Value method because I don't intend to have a flatmate long-term and this method allows you to write off the value quicker.
For the first line item let's assume that you had a valuation done before settlement which valued the existing chattels i.e. carpets and curtains, but did not provide a specific breakdown. Use the online Depreciation rate finder and calculator to look up the specific asset class and plug in your values and it calculates it all for you.
Table Three: Depreciation apportioned by business use
Depreciation
Total Cost
Total Deprecitated
Business Use
Deductible
Closing Value
Existing Chattels (default class - 40% DV)
$1000
$4000
50%
$2000
$6000
Washer Dryer (30% DV)
$1200
$360
50%
$180
$840
Living Room Furniture (20% DV)
$2000
$400
50%
$200
$1600
Sub Total Deductible
$2380
Now that we have calculated our 'Expenses', 'Other Expenses', and 'Depreciation', we put it all together to calculate our Net Rental Income.
Table Four: Net Rental Income Statement
Income: $18200
Expenses: $27015.50
Other Expenses: $305
Depreciation: $2380
Net Rental Income: ($11503.50)
Congratulations. You've made a loss.
This should demonstrate that it's easy to be in a situation where you are making a loss from renting a room in your house to a tenant. Once you've got this number you add it to your IR3 as 'Other rental income'. The rental loss will reduce your overall taxable income and IRD will automatically calculate your refund.
As a rule of thumb, you'll get back (the loss) x (marginal tax rate). For example, if you had a marginal tax rate of 33% using these numbers you'd get approximately $3800 back.
If you wish you had known this sooner, don’t worry! You can go back and amend previous years' returns with minimal fuss. Just call the IRD and tell them that you need to amend your return to declare other rental income. You may have to ask them to go away and read QB 23/08 so that they can figure out what you’re trying to do.