Tax issues when living in your rental

Question from Jo updated on 27th March 2007:

I have bought my first home for $560K and the settlement is end of Jan 07. I would like to clarify few things regarding tax:- (1) If I stay in my rental house ($280 p/w) and rent out the house for say $450. My mortgage would be $800 p/w. Can I claim any tax rebate. (2) If I sell the house within 3-6 months, should I need to pay GST of the profit to IRD (3)If I stay in the house, can I claim any tax rebate? (4) Is there any implications/benefits, if I register the house in say eg. trust a/c. Thank you.

Our expert responded:

When a person lives in their own rental property, then the property is not available for rent and any expenses incurred are not tax deductible. This is the case regardless of who or what owns house - an individual, company or trust. Any tax refunds will be in direct proportion to the split of expenses between when you were living in the house and when tenants were living in the house.

If on the other hand, you are one person taking a bedroom in your own rental property with say four bedrooms, then the expenses will be apportioned so that 75% of them are deductible and the other 25%, being your share, will not be tax deductible. Whenever a house is purchased as a long term buy and hold, it is wise to make sure this is well documented with the bank, your solicitor and accountant, to verify that your intention at the time of purchase was to own the property long term. That way, should you have to sell in the future, it will be unlikely that you have to pay tax on any gain you make.

Whether or not a person pays tax on their capital gain comes down to their intention at the time of purchase. Please be aware though that IRD will investigate people who own property for a short time before on-selling it - that information is publicly available. In owning a property for a short time, it will pay to document your reasons for selling the property and having evidence to support those reasons, otherwise you may end up with a tax bill that you weren't expecting. It always pays to take advice in situations like this.

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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