Newbie having to fill in IR3 (& IR3R) for rental income

[tabinoke]

Hi there!

I have a few questions regarding having to fill in an IR3 (plus IR3R form) for the 2014 tax year. My fiance and I purchased a property last year in July 2014. It was already being rented out, so we just took over as landlords and got ourselves a property manager.

This is the first we'll have to file an IR3 and IR3R form. We've got a copy of the IRD's IR264 booklet, which helps to explain how to fill an IR3R form but there were a couple of things that weren't too clear. I've also contacted the IRD and got some direct answers but they were vague on others, seeming to say that I just need to "use the website"...which I've tried to, but being new to all this, have found it a little confusing. I'm hoping someone here will be able to shed some light?

My first enquiry is regarding how to fill in our individual IR3 forms in relation to receiving rental income because we both own the property. The lady at the IRD seemed to say that we should just halve the numbers. Does this mean we put in half the nett rental income received in our individual IR3 forms? And what about the IR3 form? Do we fill an IR3 individually and halve all the figures there too? Note that we'll be wanting to fill this online.

My second enquiry, and this is the one I've been having problems with the most, concerns Depreciation. How do we calculate this if the assets were already in place of the property when we bought it? The property was already being rented out and we just took over with the tenant staying on.

Unfortunately we didn't get a chattel valuation when we bought the place so have no real idea on how old things are. Assets that were already in place when we bought the property include: heat pump, multi-burner, water heater, drapes, carpets and stove. We'd be able to determine the age of the multi-burner as it's in the District Council's report but I wouldn't know how old the other assets are.

With regards to building depreciation, I was told that we can't claim this anymore as it was scrapped in the 2012 tax year?

That's all for now. Thanks in advance for taking the time to read this and hopefully someone will be able to help! I realise that some of the questions may seem a little silly, but we're very new to this and want to make sure we do this right, so any advice is hugely appreciated!

Thank you!

[artemis]

Yes, one IR3 and IR3R each.

You can still get a chattels valuation. I usually get one but on the odd occasion when I didn't I documented the chattels in detail with estimated age/value, taking a very conservative approach. Some things like carpets, curtains and appliances probably have close to nil book value as they depreciate fast, so prob best left off the depreciation schedule. You could see if there are closed auctions on Trademe for same or similar items, save the pages to support your valuation.

You are right, no building depreciation now except in some very limited circumstances.

[artemis]

These from the IRD site are useful re chattels depreciation.


Interpretation Statement 10/01: Residential Rental Properties - depreciation of items of depreciable property ("IS 10/01") and General Depreciation Determination DEP 80: Residential Rental Property Chattels

[Anthonyacat]

Hi Tabinoke

First question, just halve the numbers. Fairly simple stuff.

Second question on depreciation is harder. I'd always recommend a chattels valuation is done. You can do it yourself with estimates etc, but they need to be backed up by evidence (such as Artemis says, trademe postings, new-cost less reasonable estimations of age, etc). As Artemis says, you can still get a chattels valuation done. Usually doesn't need to be done as soon as the place is purchased.

However, you may not have time. Since it looks like you don't have an accountant/tax agent, you'll be aware that your filing deadline is very quickly approaching. From memory this is 7 July - as a tax agent, all my clients get until the following March, so I don't deal with the July deadline very often.

As to your final question: Yes, building depreciation can no longer be claimed. This isn't a big deal at the moment as property prices are increasing, but if the country ever gets into a stagnant property market for a long period, landlords will be hurting as their buildings are genuinely decreasing in value.

My recommendation is to get a chattels valuation done. Then, either file your return late, or find an accountant to provide you with an extension of time until March. The former option will put a black mark on your name with IRD for a couple years, and cost $50 per return in non-deductible penalties. The latter will cost whatever the accountant charges, and you'll have the IR-forms done for you, with no errors, and maybe some added useful advice!

A third (and in my opinion worst) option is to elect not to depreciate. This will allow you to file your returns now, and simplify your calculations in future years, but it will end up costing you a lot more over time, as once you have chosen not to, you can't decide to later on.

Send a PM if interested in discussing with me further. Rosco is another accountant on the forum here, who is very good.

[artemis]

Also, you can call IRD and see if they will give an extension of time. Good chance they will if you have a decent reason. Probably not more than a week or two though. You can also request via secure mail if you have an IRD online account (you should) but the turnaround time may be too slow to get a reply before the deadline.

Personally I would file on time if humanly possible!

[Anthonyacat]

Personally I would file on time if humanly possible!

Which will be easier if you decide to get an accountant who can provide EOT!

[tabinoke]

Thanks Anthonyacat and Artemis for your quick and informative replies!

To be honest, I'm leaning towards not having any depreciation done for a couple of reasons. Firstly, because we actually bought the property (a 4 bedroom house down in Southland for 1/10th of an Auckland price!) in view of moving into it, which we will by the end of the year. we're only renting it out meanwhile to help pay the mortgage until we move in.

Secondly, it's quite an old property so I don't think many of the chattels are worth much and we are wanting to eventually replace many of it after we move in. I would also not know how I'd be able to find out the age of these chattels to even start estimating their value. The only chattel we know of its age (as it was reported in the District Council report) and could depreciate is the multi-fuel burner but even then, it's pretty old from the 90s.

Thirdly, we don't have much in place of funds or time to secure an accountant....although if we were to do this again next time, we most certainly will!

So, my next question is, if we elect to NOT depreciate chattels, how do we go about this? Where do we state this on the IR3R form and what would we state? And would we have to state this for each specific chattel we're not wanting to depreciate? ALSO, if we don't want to depreciate the current chattels, would this mean we wouldn't ever be able to depreciate it even after we get new replacements? E.G: don't depreciate current carpets but will purchase new carpets later on; so can the new carpets be depreciated?

Thanks again SOOO much!!!

[Rosco]

Hi Tabinoke,

I would ring IRD for an extension. They will easily give you a few weeks extension, and this will take the pressure off and save a penalty. This doesn't leave a black mark, and ultimately IRD are there to help you, not just penalise you.

If you choose not to depreciate chattels, just don't put any in the IR3 or IR3R.

Some really basic notes to help you complete IR3 (as stated above you would include 50% in each person's tax return)
- obviously you return all the rent you receive up to 31/3/15. If you received March rent on say 1/4/15 from your property manager, this is also rent in the 31/3/15 year. Generally the rent you received will match to the summary your property manager gave you

- Interest, make sure you only claim interest and no principal. Your bank should have given you an annual summary
- You can claim property management including the GST portion, and repairs (see notes below) they pay on your behalf
- Make sure repairs are repairs. So if you painted or fixed something within the first 6 months this is most likely a cost of buying and not a repair
- After the initial period of 6 months, any asset under $500 can still be a repair, as long as not purchased with other assets
- presume rent is just going into your private bank account, so claim maybe 1/3rd of bank fees
- Claim insurance
- claim legal fees for purchase, plus any rates paid
- claim rates
- if you received a bank contribution to your legal fees, this will be income.

Good luck

Ross

[tabinoke]

Hi Ross,

Thanks for your reply and all the info! It's all been incredibly helpful. I really wish they would teach this and other financial matters in school!

Anyway, do you know if I choose not to enter any depreciation into the IR3R, does this mean we can never enter any depreciation for that property in the future? Even for things we purchased after our filing date?

And with regards to ensuring we just claim interest and not principal, at the end of every monthly bank summary for our loan account, there is section under "Totals" which states "Interest Charged". Is this the interest we claim?

Thanks again kindly!

[speights boy]

- if you received a bank contribution to your legal fees, this will be income.

This way discussed here a few months back.
It seemed many people were not treating it as income.

[artemis]

You can claim depreciation on new chattels purchased even if you didn't claim on items in the property when you bought it. Can only claim for the months since chattels purchase though, not for the full year (unless purchased in April).

[Anthonyacat]

I really wish they would teach this and other financial matters in school!

Anyway, do you know if I choose not to enter any depreciation into the IR3R, does this mean we can never enter any depreciation for that property in the future? Even for things we purchased after our filing date?

And with regards to ensuring we just claim interest and not principal, at the end of every monthly bank summary for our loan account, there is section under "Totals" which states "Interest Charged". Is this the interest we claim?

Wouldn't it be great if basic tax law and accounting concepts were taught in secondary school? But really, simple budgeting and life skills are more important, and they're lacking also.

Your election not to depreciation applies to each individual asset. Once you purchase new assets, they can be depreciated as normal. [EDIT: I see Artemis beat me to this. And yes, he also added an important distinction. You can depreciate from the start of the month in which the assets were purchased, not the whole year]

The interest on your monthly summary is the interest you charge. It's possible that the March/April statement shows you the total interest in the year to 31 March 2015; so check that before going through and adding up the others!

[Returning bank contributions as income] wa[s] discussed here a few months back.
It seemed many people were not treating it as income.

Sadly, there are a lot of people who consciously break our tax laws. There are even more who do so out of ignorance.

[eri]

imagine if

the road code changed every year

it'd be like trying to drive in auckland

1 day you can go straight or left at the lights

the next day you can only go left

or straight

but no choice whichever they choose

[Anthonyacat]

imagine if

the road code changed every year

Yeah; people would be encouraged to hire specialist driving advisers, or chauffeurs to do their driving for them. The driving advisory practitioners would probably need to be regulated by their own chartered institute of some sort in an attempt to ensure regular training is undertaken, and quality is maintained!

Don't think it'd be the end of the world really. Quite unnecessary, of course. But hardly Armageddon.

[eri]

still

people would die

with their eyes on the speedo, road markings, signage

instead of the real danger

other drivers

with their eyes

also off the prize