In which tax period are rents, insurance, claimable?

[smerriman]

I recently purchased a rental property and immediately began renting it out. This occurred in February, so the house has been rented for 2 months of the tax period just ended.

I paid for insurance, rates to cover a year's period from February 2015 - January 2016.

Do I claim the whole amount paid as a rental expense, given that the payment was made in this tax period? If so, what would happen in the future if I stop renting - that would mean part of the insurance/rates weren't meant to have been claimed.

Or do I just claim 2/12 of the amount, given that the house was only rented out for 2 months of the tax period? If so, when do I claim the other 10/12? Next year, and in future years, do I claim 10/12 of the old amount, and 2/12 of the new amount? That would mean claiming an expense on something I paid for in a tax year that was already complete..

None of the rules in the tax guides seem to mention what happens when you're making a payment that covers multiple tax periods (specifically a future one) - they all assume you can apportion them in retrospect.

[artemis]

Claim in the period paid. Perhaps make a note on the accounts saying so, though in fact it will be pretty obvious. If you stop renting because selling, the amounts paid in advance will be apportioned between you and the buyer.

If depreciating chattels, this does need to be calculated for months since purchase, in this case 2.

[smerriman]

That's what made most sense to me too. But what if I say, I decide to move in part way through the year (without having planned this in advance)? Can the amount claimed be 'corrected' in the next tax year in some way?

[ScottSI]

Keep quiet! (IRD might send out the hit squad over a few hundred dollars otherwise).

You should create a credit on your accounts as if you had sold the house if you are that concerned.

The moment you move in all claims for interest, rates, insurance, maintenance stop as of that date as does showing rental income.

If you continue to claim it is illegal so be careful there.

If taking in borders this is treated differently and there is a section in the IRD Rental guide about this.

[smerriman]

Thanks for the replies.

I just realised another issue is that, given I've only started renting it out, the few weeks of rent I've received probably isn't enough to actually cover all of those expenses. So I guess that means I can't really claim for them in full, despite the fact they're going to be covering most of the next tax year.

[edit]

Actually, I've just been doing some more research - I finally managed to hit upon the right keyword (prepaid expenses), which leads to several results about what to do with insurance in particular. It seems my alternate method (claiming in two stages based on partial months) is indeed a valid approach, and is probably the best idea from the IRD's point of view.

[ScottSI]

Seriously - not to sound rude but go see an accountant or get some books out from the library about investment & tax etc and read like mad. You are dealing with hundreds of thousands of dollars in property not $50!

Paying out more than earned is called a loss, this is the used to get a tax refund against your income depending on how the property is owned - sole, partnership, LTC, or carried forward - company or trust.

This is why everyone buying in Auckland generally get tax refunds - put in a $1 and get back 30 cents from IRD - score!

You could apportion bits of your insurance etc but why make it complicated????

Just claim in the tax year you pay like most people do.

[Rosco]

Insurance - as long as under $12,000, and not prepaid more then 12 months in advance from balance date, then can claim all in the period paid.

So most property investors would claim when paid, as this is much easier and gives a bigger deduction when starting out.

If you move into your rental in the next year - then you will need to adjust the next years return, and probably have a negative insurance as an expense.

As was mentioned above, get an chartered accountant who specialises in property as there are thousands of little issues such as the one you have mentioned.

Ross