Query Income Tax

[nzguy]

Hello friends,

This is my first post here so will be great to get help.

Me and my wife jointly own a house with a joint mortgage .

Current Monthly Total loan repayment amount is NZD 2500

It is the first year of our house purchase so Monthly NZD 2500 = NZD 2000 ( Interest) + NZD 500 (principle) repayment


Since last 3 months we have got a flatmate in a vacant room . He's not a boarder and we are not giving him meals .

From him we get a monthly rent of NZD 900 ( expenses are extra) so we earn NZD 450 ( each ) as it is jointly owned house.

Query :-

I checked IRD guide and noted that mortgage interest can be considered as an expense.
as our mortgage interest is NZD 1000 (monthly per person ) and income is NZD 450 per person ,
it implies we don't have to declare it or pay any tax?
Is my understanding correct?

Please guide

[spaceman]

LOLZ....no your understanding is not correct.

Mortgage interest can be treated as an expense ….true......if the mortgage is for a property that generates assessable income.

You are supposed to declare income from all sources ….not just the ones you feel like declaring.

There are many options as to how you can structure your affairs to minimise the tax you pay legally, not declaring income isn't one of them.

I would encourage a lot more learning of the basics ….reading the IRD quide IR 1037 would be a good start.

https://www.classic.ird.govt.nz/forms-guides/number/forms-1000-1099/ir1037-guide-boarders-flatmates-tenants.html


Good luck

Cheers
Spaceman

[nzguy]

Hi Spaceman

Thanks for message
My intention is to pay tax whatever it is .

If I check IRD guide IR264 page 7

It says we can deduct following as expense

Interest
You can claim the interest charged on any money you borrow to finance your rental property. However, you can't claim all the interest as an expense if you borrowed the money for another purpose as well as buying the rental property.

I also read the guide shared by you and difference between boarders and flatmate and 2 methods you calculate payable income

However I’m not getting clarity on considering mortgage interest as expense in my case

You mentioned that mortgage is expense for a property that generates assessable income and my property is my home not ab investment property so interest can not be considered as an expense ?

[Bob Kane]

It sounds like this is a PPOR and not an investment rental.
If so then no interest can be deducted.

[spaceman]

It sounds like this is a PPOR and not an investment rental.
If so then no interest can be deducted.

na-na-na-na-na-na-na-na Wrong-man.(to the Batman theme of course)

From IRD IR1037

Flatmates and tenants In most flatting situations payments made by one flatmate to another as a share of the overall cost of the accommodation isn't likely to be classed as taxable income.
But if one flatmate (usually the house owner) sets out to profit from the contributions of others who share the accommodation, this profit is income. If you're in this situation you need to declare this as income. Use the ordinary tax rules (rental income, less allowable expenses) to work out the final amount to put in your end-of-year tax return.

The general rule is (not verbatim) expenses incurred creating assessable income are deductible.

Income is derived from renting out a room.... expenses related to that income are deductible...…..if it was a 2 bedroom place an argument could be made for claiming 50% of mortgage expense...PPOR be dammed.

Cheers
Spaceman

[Bob Kane]

You are usually right.
Should they claim the full $2000 monthly interest or 1/3 of that?

[Learning]

My guess would be that you'd have to work out the percentage of the house available for the flatmate. 100% of the intrest would be claimable for the areas that are for the sole use of the flatmate. 50% claimable for shared areas (living room, kitchen, etc) and 0% claimable for your private areas.

[spaceman]

You are usually right.
Should they claim the full $2000 monthly interest or 1/3 of that?

It's not clear how many rooms in the house 2 beds 50%, 3 beds 33%, 4 beds 25%....would be one way to do it.

Another would be a % based on floor space..... but I figure that would be a bit messy
Another would be on occupant., 3 occupants, 1 paying rent so 33%

TBH I don't know if there is a hard and fast rule regarding this IR 1037 gives a couple of options. But they both appear a bit messy to me. EG

For example, if you rent out a flat that takes up a quarter of the area of your house, you can claim 25% of the house expenses

If one bedroom is rented and it takes up 25% how do you account for use of the lounge, kitchen bathroom etc.

I would argue that my method of 2 beds 1 rented = 50%, 3 beds 1 rented =33% and so on, is the most sensible method...….BUT..... I have never done this and don't intend to. So I have no direct knowledge, maybe when one of the real accountants gets back from holidays than can provide some real world input..... as long as it isn't that blithering idiot who pretends he is knowledgeable accountant

Cheers
Spaceman

[Anthonyacat]

Looks like your 'blithering idiot' comment may have scared all the real accountants away in case you were talking about them!

Spaceman's method described above is a reasonably defensible one, and that's what you're after with the IRD - if they ever ask for more detail you need to be able to defend your position.

Personally I prefer a slightly more complicated method that I believe is closer to commercial reality. Fact is, if you had one person living with you and you charge $900, if their partner moved in with them you would presumably put the rent up a little? Reflects the added wear on the house, and the commercial fact you're housing an extra person. So if you'd charge more rent for more people in the same room, then there should also be a higher expense apportionment in such an instance.

Long and short of it is I'd prefer to look at the floor area of the house, and split it into "Private Areas", "Rented Areas", and "Shared Areas". You claim 0% of the Private Areas (such as your own bedroom, any related ensuite, maybe your office) and 100% of the Rented Areas (such as the tenant's room, and any other exclusive space you've allocated them) and then the Shared Areas (kitchen, lounge, basically all the rest of the house) apportioned by number of people - in your case, 1/3. Doing the math, this will likely work out as a % claim of 25-35%.

You declare all the rent, and claim X% of the related expenses - mortgage interest, rates, insurance, etc. In my opinion, this is a more defensible method.

[spaceman]

Looks like your 'blithering idiot' comment may have scared all the real accountants away in case you were talking about them!
……..

It's been a while so I can't remember his name.....you are not him.....yay for you!!!

Your method, which you admit is more complicated...…. is more complicated

Defensible vs more defensible is down to personal preference. If it was my money on the line I would go with the more aggressive approach, others wanting to be less aggressive is fine.

I think knowing there is more than one way to skin the cat and being given the option of picking your preferred method would be one of the hallmarks of good advice from a good accountant....that and a waterslide of course.

Hope you had a nice holiday

Cheers
Spaceman

[Ray Cheng]

No matter it is a net rental income or loss, you have to file a IR3 (Income Tax Return) with IR3R (Rental Income Schedule) to IRD annually because the rental activity is taxable. You can claim the mortgage expense along with other expenses (council rates, utilities, insurance, etc.), but the deductions you can claim are based on your actual costs, apportioned based on floor area. In addition, the Ring-fencing policy has been introduced this year, which means you cannot use your rental loss against your other taxable income.

[Anthonyacat]

Errors in the above.

If they were classed as boarders (which they are not, in this case) costs can be based on standard cost formulas, and it need not be filed on an IR3 if there is no profit. Just saying, dont *always* have to file the IR4 and IR3R.

Additionally, I want to say that ringfencing doesnt apply to renting your own home whole you live there. I cant recall why right now, and would need my notes at my desk. But am 95% sure that if flatmate income makes a loss, you CAN deduct against other income, in the same way you can for a mixed use holiday rental, or an AirBnB activity.

[Ray Cheng]

Thank you for the correction Anthony. Completely forgot the 'main home' thing as I have not filed any return for 2020FY.

[donna]

Errors in the above.

Additionally, I want to say that ringfencing doesnt apply to renting your own home whole you live there. I cant recall why right now, and would need my notes at my desk. But am 95% sure that if flatmate income makes a loss, you CAN deduct against other income, in the same way you can for a mixed use holiday rental, or an AirBnB activity.

This is interesting but I am guessing if the house is in a family trust the loss would be ring-fenced in the Trust and therefore not deducted from 'personal income'. Or are you saying as it's your 'PPOR' whether it's in a Trust or not is irrelevant and the income can be offset against personal income?

cheers,

Donna

[Anthonyacat]

Starting to become a complex situation now, so a full answer would take a bit of research and a lot more time than I want to put in here now, but if a trust owns a property it will never be able to be offset any loss (rental or otherwise) against personal income. Trusts can't attribute losses. But in some cases these losses could be offset against other trust income (interest, dividends, etc).