Dealing with flatmate income

Shung asks:
(updated on Tuesday, July 25th 2017)

I'm buying my first residential property in Wellington and I need some tax advice. I'm planning to rent out a spare room in the house and get a flatmate (not a boarder) to help pay the mortgage.

I read somewhere that forming a look through company (LTC) might be beneficial in this circumstance because my intention is to get flatmates and that way I'll be able to claim tax deductions from the expenses occurred (mortgage interest, income tax from PAYE, etc).

My understanding is that as long as I apportion the expenses to the actual amount used by the flatmate (eg: dividing the power bill by two) and file this in my tax return, then this is not considered tax avoidance?
Could you please clarify whether my thinking is correct? Also, will mortgage interest be claimable as well if the property is registered as an LTC when I buy the property?


Our Experts Answer:

There is no need to form an LTC to deal with income from flatmates. The flatmate income is generally secondary to the predominant purpose with the acquisition which is to own your own home. Plan the ownership around the predominant purpose.

Expenses incurred in earning the income from the flatmates can be deducted against the income and, as you say, this must be apportioned between the income earning activity and the private and domestic activity. You can visit the IRD website and get a copy of the IR264 booklet on rental income. This has an entire section devoted to accounting for income from flatmates and boarders and the distinction between the two.






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