Header Ad Module

Collapse

Announcement

Collapse
No announcement yet.

Tax Deductions Disallowed for Additional IP

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Tax Deductions Disallowed for Additional IP

    Scenario

    PI has 3 residential rentals. Buys 4th property with
    a small, rentable cottage, as an additional rental, with
    an eye to adding another building.

    Circumstances change.

    Cottage is sold (for removal) and a proposal is considered
    for building two rentals. Fall-back is possibility of selling
    one or both prospective rentals, if need be. (Sub-
    division pre-approved at time of purchase).

    PI still owns property when a further circumstance change
    occurs which complicates the matter, even more;
    preventing construction from starting. Property is
    put on the market: remains unsold as as 31 March.

    Accountant disallows all deductions on this property
    as the PI is in the business of residential rental and no
    rental income was received in that year
    , from that property.

    Huh? This just doesn't seem right, to me.

    My understanding is that the PI is in the business of residential
    rentals, collectively. I.e. for tax purposes, whatever costs
    incurred in any year that relates to that business are deductible.
    Not that costs and income are apportioned to each rental,
    in some perverse way.

    An analogy: a rental (reno) is bought in February. Lots
    of costs incurred in February & March; but no tenants
    (and no rental income!) until April. (Next tax year)

    Would the PI not be allowed those prior tax year costs as
    deductions, simply because no income was earned from
    that rental in that year?

    Is this truly a trap for the unwary? Any experience or
    clues, folks?

    Footnote: Although I don't see how it could make any difference,
    the PI does not own the property directly. It's held by a family Trust.
    Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

  • #2
    Hi Perry,

    I'm just looking at a copy of an IR3R (Rental Income) form I have. The instructions on the back do say to fill one out for each property, so it seems that the IRD does apportion costs to each property.

    As for your question about the rental that has not tenants until the new tax year, my understanding is that costs are only deductible for the period that the property is available to produce a rental income (i.e., available to rent). (I'm sure I read this in the IR264 publication.) For my own property, it has been owned by a trust since 4 August. However, it has only been available to rent since 1st September, so I won't be able to claim expenses interest costs, depreciation, rates, or insurance for August.

    It is a trap, but I think it is a pretty well signposted trap.

    Paul.

    Comment


    • #3
      I agree with Paul's take on this & in my eyes it is fair enough.

      Why should you have tax benefits for a vacant property accruing significant losses when the property isn't even available for tenants? Intent is only part of the basis for deductions.

      Comment


      • #4
        Originally posted by roseneath rat
        I agree with Paul's take on this & in my eyes it is fair enough.
        Of course its fair - its the IRD's job to be fair.

        Comment


        • #5
          My accountant arranged with ird to carry forward that property that settled two weeks before the end of the year into the next year as we had purchased for rental and had to reno before renting. All cost etc were carried forward
          Super dad
          I put it to you your property was available to rent from 4 aug and you could not find a tenant prior to 1 sept. Your property should always be available to rent, some folks will live in a cardboard box on the road side so why wouldnt they live in a partly renovated house .key word AVALABLE does not mean you have to take on anyone who knocks on the door
          Last edited by cantthinkofanickname; 18-09-2006, 08:13 PM.
          I'm sick of the crumbs i want a piece of that pie

          Comment


          • #6
            Leaving aside the IRD's specious "fair" aspect, there's a
            lack of reasonable consistency in what's being suggested.
            (Yeah, I know, no surprises, there.) E.g. take a five day-a-
            week commercial business like an accountancy practice.
            They are not open nor available seven days a week. But
            I very much doubt if they only deduct 5/7ths of their costs in
            their annual return.

            Likewise, a manufacturer doesn't deal with each machine in
            isolation. I.e. if a particular piece of plant only 'works' for
            20 weeks of the year, depreciation is not 20/52nds of the
            total allowable in the depreciation schedule.

            If a PI has a vacancy for a period of time for renovations, or
            a Spring clean, or other reason related to the residential
            rental activity, are those days then non-deductible on
            a xxx/365th basis?

            Next thing you know, deductions will be apportioned per week:
            40/168 of expenses allowed for a 40-hour-a-week business.

            I don't use the forms that Paul mentions. The annual returns
            are done by the accountant. I provide no separate figures for
            each rental. All income and all expenses are in all in the
            figures, together.

            Very strange. But, then again, maybe not strange at all.
            Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

            Comment


            • #7
              Perry I don't think your comparisons are very fair.

              How about a business that has every intention of starting up as a commercial business, but doesn't. Doesn't bring in a single dollar of income, nor expected to in the future.

              The very basic rule of thumb of deductibility is that your are allowed to claim losses on the basis that you are generating INCOME that is taxable, whether by PAYE, general income tax or at least GST.

              The tax system is not designed to merely act as a government hand-out for failed proposals, thats what the welfare system is for.

              Comment


              • #8
                Sounds like this property has never been a rental, even if that was the intention.
                Maybe if it had actually been tenanted, even for a short time, you might have got away with it when circumstances changed.
                Find The Trend Whose Premise Is False - Then Bet Against It

                Comment


                • #9
                  Originally posted by roseneath_rat View Post
                  Perry I don't think your comparisons are very fair.

                  How about a business that has every intention of starting up
                  as a commercial business, but doesn't. Doesn't bring in a
                  single dollar of income, nor expected to in the future.

                  The very basic rule of thumb of deductibility is that your are
                  allowed to claim losses on the basis that you are generating
                  INCOME that is taxable, whether by PAYE, general income
                  tax or at least GST.

                  The tax system is not designed to merely act as a
                  government hand-out for failed proposals, that's what the
                  welfare system is for.
                  Well, you wont be surprised to know that I disagree. If there
                  was never any expectation of future income: why would the
                  PI bother? I went through the pre-purchase figures with the
                  PI concerned, before inception. It looked good. What
                  happened later was unpredictable.

                  Much like Ansett NZ's efforts, which was being supported
                  from Oz. That NZ company never made a profit. Never! It
                  would've been claiming back GST at a great rate. Would
                  you call that a government hand-out? (PAYE doesn't count:
                  that's a tax on employees, not the company)

                  I also think you're wrong in your assertion about a basic rule
                  of deductibility being the generation of taxable income.
                  Many vineyards take five years to generate income in excess
                  of expenses, current and accrued. In these cases, intention
                  does count, 100%.

                  The PI concerned is "generating income." From 3 other
                  rentals. As such, said PI has an established, commercial
                  business, over a number of years. But one IP has not worked
                  as intended. This is no different to a business launching a
                  new product line that fails, in the market. All the R&D,
                  tooling, sales promotion, advertising, production costs, raw
                  materials, etc., are fully deductible. Even though that
                  product line contributed negatively to the 'bottom line.'

                  There is no divide and (non-deductible) conquer process. In
                  that analogy, the failed product is simply a part of doing
                  business: a risk. In the same way as my acquaintance has
                  one 'failed' item in the portfolio: a risk. Why does the PI get
                  punished through a tax distortion and the airline or vintner
                  or manufacturer not?

                  Just as a PI's PAYE-liable income can be offset against other
                  (loss-making) business activities, because that business
                  activity has expenses that exceed income, so should one
                  rental activity be able to be off-set against another.
                  Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

                  Comment


                  • #10
                    The rule is that the property has to be for rent or avaliable for rent. In your vineyard example, the business is growing/selling grapes so the vines must be producing or growing.

                    With a reno, if you do the reno straight after purchase, you expense from when avalable for rent. If you have owned for a while, provided it is not "out of the market" for too long, you can continue to expense.

                    Comment


                    • #11
                      Originally posted by CJ View Post
                      The rule is that the property has to be for rent or available
                      for rent. In your vineyard example, the business is
                      growing/selling grapes so the vines must be producing or
                      growing.
                      I think you're quite wrong in that last sentence, CJ. Before
                      a business starts earning revenue, most have inception and set-
                      up costs. Most all of which are deductible. I also think you
                      miss my overall point. But, to persist with the vineyard
                      example, I think your analogy is flawed because of a mis-
                      matched comparison . . .

                      A vineyard produces nothing in year one and usually
                      nothing worth picking in year two. Year 3 is regarded as the
                      first (light) crop. So there will be a vast array of
                      accumulated costs and expenses to cover, to offset against
                      future crops, as grape production increases. Mostly, they're
                      deductible. The vineyard is "available" to produce grapes for
                      year one and two, but does not do so. That doesn't constrain
                      the vineyard's expenses deductibility.

                      Originally posted by CJ View Post
                      With a reno, if you do the reno straight after purchase, you
                      expense from when available for rent. If you have owned for
                      a while, provided it is not "out of the market" for too long,
                      you can continue to expense.
                      This sounds like a good case for stretching the word
                      "available" to its elastic limits. But perhaps I misunderstand
                      you?

                      The fundamental questions are simple: for a PI, are the costs
                      of doing business deductible? I say they are. Are costs and
                      revenue apportioned to individual units in determining
                      deductibility? I say they aren't. Or rather, shouldn't be.
                      Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

                      Comment


                      • #12
                        I think that costs involved in setting up a business (e.g. expenses incurred in finding the FIRST property) have to be capitalised and depreciated, don't they?

                        After that, the rules for PI are clear - you can claim expenses and deductions whilst the property is rented or available for rent (evidence such as adverts useful here!)

                        cube
                        DFTBA

                        Comment


                        • #13
                          My thoughts on this.

                          Going back to Perry's original post, this is how I understand it.
                          • Your PI bought some land with a cottage on it.
                          • The cottage was removed. Either the cottage was sold, or it it was destroyed. Either way, there should be some or total depreciation to be claimed here.
                          • The PI incurred some expenses in processes of creating new houses.
                          • The PI had to pay rates and interest.
                          The PI incurred some expenses in processes of creating new houses. According to Page 13 of IR264 "You can’t, for tax purposes, deduct capital expenses from your rental income. Capital expenses are costs you incur to buy or increase the value of a capital asset."

                          You may be able to get away with holding cost expenses such as rates & interest etc, because IRD are vague with "short time" also on page 13 when they say "If a property is unoccupied and temporarily unavailable for letting for a short time, because of redecorating or other maintenance, the ongoing costs will still be deductible for that period. The redecorating or maintenance costs will also be deductible, as long as the work done does not amount to making capital improvements." The second sentence stating that it is ok for property to be temporarily unavailable because you are making capital improvements.

                          So, i'm thinking your PI should be able to claim rates, interest and some depreciation for the cottage. Any other expenses for the property are probably capital expenses.

                          Comment


                          • #14
                            A couple of years ago I bought a rental which needed work done before it could be rented. That took 2 months. All the reno costs until it was rented were capitalised, not expensed. The accountant said that IRD treated this work as part of the purchase price, which was reduced because of the work needed. (As well as the 'not available for rent' issue, which also applied.)

                            Comment


                            • #15
                              Originally posted by artemis View Post
                              A couple of years ago I bought a rental which needed work done before it could be rented. That took 2 months. All the reno costs until it was rented were capitalised, not expensed. The accountant said that IRD treated this work as part of the purchase price, which was reduced because of the work needed. (As well as the 'not available for rent' issue, which also applied.)
                              What happened with costs like rates & insurances. They weren't improving the property, so do you know if they were treated as capital expenses that needed to be depreciated later?

                              Comment

                              Working...
                              X