rental income less than market rate - tax ???

[Nic D]

Advice for a new investor please.

We are renting to a family member at slightly less than market rate (charging 90% of the current market rate as appraised by a real estate agent). Doing it for family reasons, i.e. to assist a family member who cannot afford the full rate.

I'm confused about the tax treatment. IR's rental guide is ambiguous about how 'less than market rent' income is to be treated. Do I make an adjustment to 'add back' the difference between rent received and market rent? Or do I claim 90% of expenses? Or can I claim no rental loss at all? Or is there a threshold where I don't need to do anything special if the rent received is close to market rental?

I called IR and was further confused. I don't think the staff member understood it well enough. Has anyone had recent experience in dealing with IR with this, or has recv'd advice from their accountant?

Thanks in advance.

[Bobsyouruncle]

Given that the rent is more than many landlords charge tenants just treat it as normal rental. 10% is a margin for error not under market!

[Nic D]

Unfortunately not what IR said when I called them and gave them the figures! They said I couldn't claim ANY loss at all for tax purposes (even if I happened to have legit high expenses for repairs and maint) BECAUSE I am not charging the full market rent. This doesn't sound right.

[Bobsyouruncle]

I can only tell you that you should just treat it as a normal rental the discount is so low. IRD would never know nor care. Ask your accountant. You are worrying about nothing. Now if you gave IRD your details so they have a record of who you are and the conversation then you may have screwed yourself. Hopefully you contacted them anonymously.

[artemis]

Have you checked the Tenancy Services market rent site for the area? It is here:

https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/

It has lower, median and upper quartile for various types and sizes of property. Rather than rely on just one real estate agent's single number, see if your rent falls within the boundaries on the site. If it does, then print out or screen shot a copy and date it as evidence if IRD asks. Good idea to attach it to an email you send yourself so there is a dated record.

I thought that IRD requires income tax to be paid on market rent not actual rent if less than market rent. Maybe not so, but their booklet Rental Income should have the definitive answer.

[Anthonyacat]

Unfortunately not what IR said when I called them and gave them the figures! They said I couldn't claim ANY loss at all for tax purposes (even if I happened to have legit high expenses for repairs and maint) BECAUSE I am not charging the full market rent. This doesn't sound right.

The person you spoke to at IRD is correct here. If renting below market value you will need to pay tax on any profit, but can't claim any loss.

However, as others have said, that's a big if. Unless you have it in writing that your rent is set below market value, there's a good chance that it is quite within the bounds of 'normal'. Agents often quote a figure at the high end of the range, to encourage you to use their services. People who don't use agents often tend to have lower rents, because they don't pay as much attention to the market.

Do some research to check if you're actual providing below market rent. If not, and it's not in writing, and you didn't tell the IRD who you are, then you'll be fine.

[Nic D]

Thanks Anthonyacat - does that mean that we couldn't claim ANY loss, or we couldn't claim the PORTION of the loss resulting from the reduced rent (if it was in fact deemed to be 'below market rental')?

Thanks

[Wayne]

IRD and Anthony both said ANY which sounds like any to me.

Of course you have a rent appraisal so you need to now hide that also.