Claiming Expenses

[GreenTreeFrog]

We bought a house in 2005.

We lived in it for 5 months. Left it vacant for 7 months.

W then lived in it for 5 months. Then rented it out for 6 months.

Then we lived in it for 5 months and it has now been rented out for 15 months. It is to remain rented out indefinitely.

We never intended to live in it permanently and we have no intention of returning to live in it ever.

Apart from expenses we can claim during the time it was/is rented out, can we claim costs for maintenance work on the property even when we were living in it?

For instance, the house had shocking low water pressure so we had a larger pipe run from the water supply at the road (with the help of the water board) and we also had pipes in the house fixed to handle the increased water flow/pressure.Can we claim the expense for this?

Thanks!

[Rosco]

Who owned the property? LAQC, Trust or just individuals?

When did you get the work done?

Presuming individuals and work done while you lived in the house, then answer is no. Personal house, used privately = no deductions.

If work was done just before you moved in, or just after you moved out, the answer would probably be very subjective and you would probably get a different answer from each tax expert you talked to.

Also the work you describe could be capital, ie improved value of property, not just repaired. Need more details to determine this, but hopefully answer above is enough.



Ross

[Keithw]

As Rosco has said, I believe the only legit expenses would be those done in preparation for rental while you are not living in it, ie work done in order to create an income.
Even then I think you are more likely to be improving the property & therefor they will be capital expenditure rather than repairs and maintenance.
You claim depreciation on the capital items & direct expenses on the repairs.

You would really be asking for trouble with the IRD if you tried to claim full expenses while you lived in it.(unless like most people you are using it as your company office & claiming a proportion of the property running expenses- typically 1/8th or so depending on your office size)
But that doesn't necessarily mean the value of the improvements could not be depreciated while it is a rental, as the place is more valuable due to the improvements that are made between the time you bought it & the time it becomes a rental.

This is why valuations are so important when you change use from being a home to a rental or back again.

[GreenTreeFrog]

Thanks for the rapid and informative replies!

They confirm what I thought anyway. I won't be claiming!

Thanks!

[fpl]

Seek professional advice offline.

There are grey areas in what you can and can’t claim. Some are worth the hassle to claim some are not. Take your pick carefully.

[Rosco]

Seek professional advice offline.

There are grey areas in what you can and can’t claim. Some are worth the hassle to claim some are not. Take your pick carefully.

I think you are wasting time with professional advice on this one.

"Presuming individuals and work done while you lived in the house, then answer is no. Personal house, used privately = no deductions".

If my presumptions are correct, then the answer is simple and straight forward, its personal expenditure. If the circumstances are different to above, then you may have a chance, but still probably not.

Ross

[GreenTreeFrog]

Thanks for the advice. I don't like complicating issues so I am happy to leave it.

One other question though...

The property was a rental from 23 Oct 2006 - April 30th 2007 and then again from 11th Nov 2007 until current.

Between those dates, we lived in the property. When can a depreciation schedule be done from? Would it be from when it first became a rental in 23 Oct 06 or not until we moved out for good in Nov 07?

Thanks!

[Perry]

I'm torn between Daniel's comments and those from
Ross. To hypothesise . . .

Say you'd decided that the low water pressure was
a likely impediment to getting tenants. Therefore the
intention involved in the changes/improvements/R&M
to the water reticulation was business-related. That
you were living-in at the time may be irrelevant.

After all, "intention" at the time of buying an IP is
the determinant used by IRD in deciding if it was for
trading or buy-and-hold purposes.

Often, owners will endure the vagaries and foibles
of their PPOR, because they can cope. At the same
time, they may well recognise that the limitation
may not suit tenants and could even be 'actionable'
under the RTA.

Then there's the cost-benefit ratio to ponder, too.
Reflect a while . . .

[tpr2]

Perry you devil.

Succinct and extremely thought provoking.

I was with rosco on this one but you are right Perry, intention is the key word.

We never intended to live in it permanently and we have no intention of returning to live in it ever.

hmmmmmm but did they intend to rent it out?

[Keithw]

I understand what you are saying Perry, but think the IRD would say the place needs to be vacant or have tenants in place before the repairs/ improvements take place.

From the attitude I have seen from an IRD investigator, they consider anything that may even remotely have any personal use or be required for normal personal life, to be personal expenditure & not deductable, regardless of the fact you may be intending to rent the place out once the repairs/ improvements are done.

case in point -office coffee
A business premises can claim Tea & Coffee expenses for its staff.
What happens when the business premises is your home ?
What this investigator insisted was any coffee in your normal kitchen (if thats also what you use as the business kitchen) was personal sustanence & therefore not a business expense.
Any coffee making facility in the actual office or waiting room for guests could be deductable provided that was its sole purpose & was not used for personal use outside the office hours (if there are such things when working from home ) or would not be part of your normal personal sustenance.
Same applied to bottled/ filtered water.

If they can be so definitive over something as small as coffee, I doubt you willl find them giving the benefit of the doubt over repairs done while you are in residence.

I think in the IRD's poker rules, any hint of personal use trumps vagueries like intention !

[Keithw]

The property was a rental from 23 Oct 2006 - April 30th 2007 and then again from 11th Nov 2007 until current.

Between those dates, we lived in the property. When can a depreciation schedule be done from? Would it be from when it first became a rental in 23 Oct 06 or not until we moved out for good in Nov 07?

While the property is available for rent or being made available for rent you should be able to claim depreciation. so that means you can start your schedule 23 Oct 2006, but must suspend it for the time you lived in it.
If you use Straight Line rates its easy, its just 6 months worth til April 07 then a further 15 months worth from Nov 07 to Feb 09.

If you use diminishing value rates, then to do it properly I think you should calc the depreciation at the end of the first 6 months & then consider that the assets will continue to reduce in value while you are in residence.
This means the starting values at the beginning of the Nov 07 tenancy will actually be lower than the ending values at April 07. so you have to restart your depreciation schedule (ie a second one) with these new values & calc 15 months worth.

[Perry]

Keith, the IRD just love being picky. They thrive on it,
especially as the whole house of cards is stacked in
their favour. Also, the rely on the ignorance of tax-
payers (in not challenging IRD presumptions and
the edicts of its staff).

I understand what you are saying Perry, but think the IRD would
say the place needs to be vacant or have tenants in place before
the repairs/ improvements take place. If they can be so definitive
over something as small as coffee, I doubt you will find them
giving the benefit of the doubt over repairs done while you are
in residence.

They may say that, but it does not mean that it can't
be disputed.

To give you one personal example. A GST return item that
reduced tax by about $40 was listed in the adjustments
line, but was unilaterally deducted. The 'reason' given was
'refund amount changed.' In other words, IRD gave no
reason, (cos they can - they have the power!) just a des-
cription of what had been done - which was quite obvious
to most anyone, anyway.

On principle, I filed a NOPA (Notice of Proposed Adjustment)
and they just paid the $40 without a word of communication.
Now spread an amount of $20-50 across all NZ GST payers,
many of whom probably wouldn't be bothered to protest
because it wouldn't be cost-effective . . .

The coffee nonsense is easily challenged. It's just a try-on.
Where do business callers go to wash their hands, or use
the toilet?
"Sorry, you can't use the one in our house, because we use
it for personal purposes, too. But I've rented a motel unit,
across the road, so you can go over there."

Flagrant, self-serving idiocy. Which needs to be challenged!

Terry

In a thread lurking on PT somewhere, a poster said that if
your accountant / lawyer / adviser knows more than you
do, you're in trouble. It was a gripping and enigmatic thread,
well worth the search, if you're lucky. I recall the point was
that such were advisers and taking advice blindly, or failing
to insist on something contrary to said advice was or could
be an unwarranted risk.

[tpr2]

Indeed Perry and I was applauding your interjection.

[fpl]

In a thread lurking on PT somewhere, a poster said that if
your accountant / lawyer / adviser knows more than you
do, you're in trouble. It was a gripping and enigmatic thread,
well worth the search, if you're lucky. I recall the point was
that such were advisers and taking advice blindly, or failing
to insist on something contrary to said advice was or could
be an unwarranted risk.

Did you had this in mind?

"4. Should you choose to become an investor you need to know more and constantly educate yourself in a wide range of subjects. As a saver or new investor you need professional advisors to give you advice. A professional investor on the other hand needs a professional advisor to help execute plans." http://www.propertytalk.com/forum/showthread.php?t=9570

http://www.propertytalk.com/forum/showthread.php?t=9570

Excellent points Perry!

[Perry]

It was along those lines, but more generalised,
as I dimly recall. It was both more specific and
more general. Specific in the sense that a PI did
need to 'know' more than related professionals
and general in that the ambit included accountants
lawyers and such, rather than any sense of any
generalised 'financial' adviser.

I'll bend my brain to see what I can find . . .