Are there tax benefits to owning a rental home?

Question from Ben updated on 21st August 2008:

I am wondering what the tax benefits are of owning a rental home that costs more in interest, expenses etc than I receive in rent? How much tax would I expect to get back if there is approximately a $8,000 difference?

Our expert responded:

When considering a situation such as this, you are quite right in posing a question over the cash loss. However, there are two other things that should be taken into account - depreciation and capital growth. The depreciation will increase your loss, but as it is an allowance for fair wear and tear and reduction in value, it has no cash effect. It provides 'phantom cashflow'.

The other thing is capital growth, and is the percentage / value by which the property is growing each year. In New Zealand, property historically grows by 10% per annum. Without allowing for compound growth, this says that the value of your property will double in 10 years. More importantly, this growth is tax free, assuming you bought the property with the intention of owning it long term.

So, if you have a cash loss of $8,000, plus a depreciation loss of say $5,000, then your total tax loss will be $13,000. You will get a refund if the property is owned in your personal name or through an LAQC, and the tax refund will be based on whatever your personal tax rate is. So, assuming a 33% tax rate, your tax refund from IRD would be $4,290, which when added to your cash loss of $8,000 gives you a net cash loss of $3,710. If you own the property through a trust or standard company, the the tax loss of $13,000 will be carried forward to be offset against future year profits.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth.  She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.



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