Rental Properties and Accounting in New Zealand: A Comprehensive Guide

Investing in rental properties is a popular wealth-building strategy in New Zealand, offering long-term capital gains and regular income. However, to truly make the most of your property investment, it’s essential to understand the accounting and tax rules that apply. From allowable deductions to annual returns, staying informed ensures you remain compliant with Inland Revenue (IR) regulations while optimising your financial outcomes.

This guide covers the key aspects of rental property accounting in New Zealand, including claimable expenses, tax obligations, recordkeeping requirements, and changes to property tax legislation.

1. Rental Income and Tax Obligations

All rental income received must be declared in your tax return. This includes:

• Weekly/monthly rent payments

• Bond money you retain (e.g., for repairs)

• Insurance payouts (for lost rent)

• Expenses paid by tenants that would normally be your responsibility

If you co-own the property, income and expenses are typically split according to ownership share (e.g., 50/50 for joint owners).

Tax Rate:
Rental income is added to your total income and taxed at your marginal income tax rate, which ranges from 10.5% to 39% for individuals. Companies and trusts have separate flat rates.

2. Claimable Rental Property Expenses

To reduce your taxable income, you can claim a range of expenses directly related to earning rental income. These include:

a. Operating Expenses (Fully Deductible)

These are the everyday costs of running a rental and can be claimed in the same tax year they are incurred:

• Rates and water charges

• Insurance (e.g., building, landlord protection)

• Repairs and maintenance (excluding improvements)

• Legal fees (under $10,000 per year)

• Accounting fees

• Advertising for tenants

• Bank fees related to rental accounts

• Vehicle expenses for inspections and maintenance (use a logbook or claim IRD’s mileage rate)

• Body corporate fees (if not related to capital improvements)

• Property management fees

• Depreciation on chattels (e.g., carpets, appliances — not on buildings)

• Interest on loans (see section 3)

b. Apportioning Costs

Some expenses may only be partially deductible. For example, if you live in part of the property or use it privately for some of the year, you must apportion the expenses accordingly.

c. Non-Deductible Costs

Certain costs cannot be claimed:

• Capital improvements (e.g., adding a new room)

• Initial purchase costs (e.g., lawyer fees, valuation, LIM reports)

• Principal portion of mortgage repayments

• Private use costs

• Depreciation on buildings (disallowed since 2011)

3. Interest Deductibility Rules (Phasing Out)

One of the most significant recent changes for residential landlords is the phasing out of interest deductibility.

Current Rules (as of 2025 tax year):

Exemptions:

• New builds (generally defined as properties with CCC issued within the last 20 years) may still be eligible for full or partial interest deductibility.

• Commercial property and boarding houses are not affected.

Tip: Keep a record of when the property was acquired and whether it qualifies as a new build. Seek advice to ensure accurate treatment.

4. Bright-Line Test and Capital Gains Tax

New Zealand does not have a general capital gains tax, but the bright-line property rule acts as a limited one.

What is the Bright-Line Rule?

If you sell a residential property within a certain number of years of purchase, any gain made is taxable as income.

• 5 years if acquired between 29 March 2018 and 26 March 2021

• 10 years if acquired from 27 March 2021

• Exemptions: Main home, inherited property, and business premises (in most cases)

Note: The “main home” exemption applies only if the property was used as your main home for the majority of the time.

5. Ring-Fencing of Rental Losses

Since 2019, the IRD has disallowed offsetting residential rental losses against other income (like salary or wages). This rule, called ring-fencing, means:

• You can only use rental losses to offset future rental income or property sale income.

• Losses are carried forward to future tax years.

This affects highly leveraged investors and reinforces the importance of strategic tax planning.

6. Keeping Good Records

Good recordkeeping is essential for compliance and can also support any IRD audit or query.

What to Keep:

• Invoices and receipts

• Loan agreements and bank statements

• Tenancy agreements

• Rates, insurance, maintenance invoices

• Mileage logs or vehicle expense records

• Property management statements

Retention Period:
Keep all rental-related documents for at least seven years after the tax year ends.

Using accounting software such as Xero, MYOB, or Re-Leased (for property portfolios) can help streamline the process.

7. GST and Rental Properties

Generally, residential rental income is exempt from GST, so:

• You cannot charge GST on rent

• You cannot claim GST on expenses related to the residential rental

Exceptions:

• Short-term accommodation (e.g., Airbnb) may require GST registration if income exceeds the $60,000 threshold.

• Commercial property rental is typically subject to GST.

8. Accounting Methods and Year-End Obligations

Rental income is typically accounted for on a cash basis (when received) or accrual basis (when earned). Most small landlords use the cash basis for simplicity.

End-of-Year Responsibilities:

• File an IR3 (individuals), IR4 (companies), or IR6 (trusts) return

• Complete the IR3R Rental Income Schedule

• Declare income and allowable deductions

• Claim any ring-fenced losses carried forward

Engaging a qualified accountant can help ensure accuracy, especially if you have multiple properties, a trust, or complex ownership structures.

9. Ownership Structures and Their Tax Implications

How you own the property affects your tax treatment and long-term planning. Common structures include:

a. Individual Ownership

• Simple and common

• Profits taxed at marginal tax rate

• Less flexibility with income splitting

b. Partnership

• Joint ownership (often spouses)

• Income split based on ownership share

c. Look-Through Company (LTC)

• Profits/losses passed through to shareholders

• Can be tax-efficient for loss-making rentals

• Shareholders taxed individually

d. Trusts

• Useful for asset protection and estate planning

• Trustee tax rate is 33%

• Income can be distributed to beneficiaries at their marginal rates

e. Company

• Profits taxed at flat 28%

• Not suitable for capital gains planning (companies don’t get the bright-line main home exemption)

Tip: Consult a property accountant to assess the best structure for your situation.

10. Working with a Property Accountant

A qualified accountant with experience in rental property tax can help:

• Prepare and file tax returns

• Structure property ownership

• Maximise deductions and manage ring-fenced losses

• Navigate changes to tax laws

They can also offer strategic advice on:

• When to renovate vs repair

• Recordkeeping systems

• Investment planning

• GST considerations for short-term rentals

Conclusion

Owning rental property in New Zealand comes with both financial opportunities and accounting responsibilities. By understanding which expenses are deductible, how interest and losses are treated, and the impact of rules like the bright-line test, landlords can better manage their investments.

As tax laws evolve, it’s important to stay updated and seek professional guidance to ensure compliance while maximising returns. Whether you own one rental or an extensive portfolio, sound accounting practices are essential to long-term success in the New Zealand property market.