Rental Property's - Private Use

Question

Our client, a company owns a residential property in the Bay of Islands. The property is rented out usually on a short-term basis to holiday makers.

Occasionally family members use the rental property. Note however, that this would be no more than two weeks a year. Previously we have claimed 100% of the property expenses due to the fact that the property is available for rent for the whole year. The company makes an annual loss of $2,000.
What portion of the costs are we able to claim for income tax purposes? Should we only be claiming the costs relative to the time that the property was actually rented?

Answer

The recent tax Bill that has been introduced into Parliament, proposes that expenditure on mixed use assets, such as a holiday homes, should be apportioned based on the income-earning use of the asset.  Under the proposed amendment, income earning days will be based on the total number of days a holiday home is used to earn income at or above market value.

These new rules will apply to assets that are used to earn income and which are also used privately and are not used for at least 62 days in an income year.  Holiday homes are one example of the type of asset that the new rules may be applicable to.

This means that expenses will only be able to be claimed as a percentage of the days rented in the tax year using the following formula:

Expenditure x income earning days/(income earning days + private days)

So if a property was rented for 20 days of the year and used by the owners for 20 days as well, they would only be able to claim 50% of rental related expenses 20/(20+20).

Although the proposed changes have not been enacted yet, the changes are likely to pass through with only minor changes to the proposal, if any.

Bearing this in mind, if the property is used by family members or friends, either rent-free or it is rented out to family members or friends at below market value, the property would be considered to be used privately.  Therefore it would be advisable to exclude from the apportionment the private use of the property.

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TAX DATES TO REMEMBER

20th October  2012 - monthly employers PAYE payment...
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