Renting out your holiday home
The income tax treatment of a holiday home that is used both privately and rented to third parties can be difficult to determine because of its mixed use. The difficulty arises because expenses of a private nature cannot be claimed, but expenses incurred to derive income can be claimed. The issue then becomes how to apportion expenses between the private and taxable use of the home.
The IRD has recently clarified its position based on general tax principles of how holiday homes should be accounted for, but has stated that each situation will need to be considered on an individual basis. Where a taxpayer can show that a particular expense directly relates to a time when rental income is being derived, then the expense may be deductible. For example, a telephone or power bill that shows actual usage while the home is being rented. However, the deduction may be limited to the lesser of the actual expenditure or rent received, (i.e. deductions cannot exceed rent received).
If the holiday home is treated as a genuine income producing asset and is only partially used for private purposes, deductions may be available for the periods during which it is available but not occupied.
Proof of the home being “genuinely made available for rent” requires evidence of “active and regular marketing” of the holiday home for desirable periods at attractive rates. If the holiday home is only sporadically made available, for undesirable periods at unattractive rates it is more likely to be a personal asset for the intervening periods and deductions therefore would not be available. Where a part of the property is not made available, the expenses should be apportioned to exclude an amount reflecting that proportion.
The IRD also contends that where the home is made available to friends or family at less than market rates, deductions should be limited to the amounts received, so the net income is nil.
Author - C 2009 University of Waikato