What is deductable?

[ilusiv]

We've just got into the rental property 'game' this year, renting out the house we previously bought to live in, and bought another (specifically) to rent out a few months back.

The place we bought had an old stove in it. After we bought the place and before we got tenants in we found that the stove (whilst working) wasn't working well, so we decided to replace it. We bought a better second hand stove for about $350 bucks, and a rangehood (as the house didn't have one) for about $200 and installed those. We also had some electrical work done (fixing power points, new RCB, wiring for the rangehood and the rangehood installed professionally) - a total cost for the work of about $1000.

We also bought a pantry unit for about $199 as the place didn't have a pantry

Are these things that we can claim as deductable expenses at the end of the year? Its not huge money we are talking and we haven't siginificantly improved the property by doing it/buying it, however some of it could be said that its not maintenance as it was done prior to tenants moving in.

[spaceman]

Not an "expense" as it was done prior to being rented.......there is an important distinction (from the IRD perspective) about when the business starts.....costs prior must be capital even if once the place is rented they could be considered legit expenses.

Cheers
Spaceman

[sam sung]

There are a couple of questions you have to ask yourself in determining whether an item is capital or revenue expenditure.

1. What is the asset you are improving?
2. Has the work substantially changed or improved the asset?
3. Is the item able function on its own?

In your case, for the $1,000 of maintenance and the pantry:

1. The asset is the house.
2. No, and I have known cases where the literally half the house has fallen down and been replaced.
3. Power points don’t function on their own

However, in the case of stove, this would fall down at question three. BUT, given that the item is less than $500 it can be written off.

I would expense all – Assuming you don’t have any assets, as defined above, that are > $500 in the $1,000 total.

[sam sung]

Not an "expense" as it was done prior to being rented.......there is an important distinction (from the IRD perspective) about when the business starts.....costs prior must be capital even it once the place is rented they could be considered legit expenses.

Cheers
Spaceman

Spaceman makes a good point which I totally missed. My reply assumes that you had the place available for rent (ie. actively seeking tenants).

[flyernzl]

Anything you do to a rental property between time of purchase and the first tenant moving in is considered to be 'betterment'.

The argument is that, if any work is necessary, then your purchase price was reduced to reflect this need.
Thus your purchase cost is the price you paid to buy the property plus the cost of the work needed to make it rentable.

These improvement costs are therefore considered to be capital expenditure not (tax deductible) maintenance.

[Perry]

Mmmmmmmm. I think this nuance has come up before. If already advertised
as available for rent, any expense incurred after that but before it is actually
tenanted is / isn't deductible?

[spaceman]

^Isn't.......think about it for a sec......It might be hard for an upright sober citizen such as yourself, but put yourself in my shoes for a sec.

Buys house.....advertises for rent, does heaps of reno's and claims a tax deduction....then oopsie daisy can't rent it out even though I tried real hard guess I'll just have to move into my nicely reno'd at the tax-payers expense house.

There is an important starting point as far as the IRD are concerned and that is when a property is first tenanted and producing income.....before = capital.... after = expense

Cheers
Spaceman

[Perry]

So it seems you disagree with Sam Sung, then?

[spaceman]

^The bit about it being ok if it's available for rent.......yes I do.

True story.......used to work for a company who imported Sam$ung stuff....had a visit by bigwigs from Korea....got t-shirts printed up with

Sam$ung: Korean for hung like a horse

Looked legit.... bigwigs were gifted them, loved them twice as much after the English was translated for them....instant collectors items, next lot asked for them practically as they got off the plane, had to get twice as many printed in the second batch quick smart

Cheers
Spaceman??????? sam$ung is a naughty word????

[Wayne]

Before renting (even though available for rent) capital in nature. Stove $350, new asset <$500 to write-off (expence), Pantry, new asset <$500 expence, rangehood, new asset, add in the cost of power and fitting probably <$500 so expense. I expect that leaves the rest of the work <$500 also so expense. So all new assets but expensed in the year brought.

[Rosco]

We've just got into the rental property 'game' this year, renting out the house we previously bought to live in, and bought another (specifically) to rent out a few months back.

The place we bought had an old stove in it. After we bought the place and before we got tenants in we found that the stove (whilst working) wasn't working well, so we decided to replace it. We bought a better second hand stove for about $350 bucks, and a rangehood (as the house didn't have one) for about $200 and installed those. We also had some electrical work done (fixing power points, new RCB, wiring for the rangehood and the rangehood installed professionally) - a total cost for the work of about $1000.

We also bought a pantry unit for about $199 as the place didn't have a pantry

Are these things that we can claim as deductable expenses at the end of the year? Its not huge money we are talking and we haven't siginificantly improved the property by doing it/buying it, however some of it could be said that its not maintenance as it was done prior to tenants moving in.

Hi,

When the property becomes a rental, you can depreciate chattels that are in it. The normal difficulty is knowing the value of the chattels, and often a chattels valuation is done by Valuit (www.valuit.co.nz). For your stove, pantry and maybe rangehood, you have approx values, so maybe you just need to decrease these slightly from the cost to allow for your personal use, then use that as your starting point for depreciation.

Have you thought about the bigger cost being interest? Say house is worth $400k, your initial mortgage is $100k. You then turn this into a rental, borrow an extra $300k to buy your new personal house. Only the interest on the $100k will be deductible! As this mortgage was used to buy the rental. The $300k is not deductible, as this loan was used to buy your personal house.

If you are in this kind of situation, then you need to see an expert to look at restructuring. It is often quite easy, but needs to be done right!

Ross