Home Office Expenses

Every investor is already paying for power, internet, and rates as a part of their household expenses (if we can assume you’re not living in a cave).

The good news is you can account for some of these costs as home office expenses.

For instance, if you can claim $3,000 of expenses that you were paying for anyway, then your taxable profit is $3,000 lower than it otherwise would be.

On a 33% tax rate, that could save you $1,000 in tax.

Travel

Additionally, you can claim a portion of the travel costs you incur visiting the property to check everything is ticking over as it should, or when you go to do repairs.

You can either use the IRD's mileage rate or claim a percentage of the total running costs and depreciation.

The link for kilometre rates for 2021 is here. The 2022 rates are typically published after each tax year ends.

For all of these methods it’s again important to realise that if you don’t claim the above you overpaying your tax. The purpose of this article is to make sure you aren’t paying more than you need to, especially as more taxes are levied on investors.

Decreasing your tax rate

After reducing your taxable income, it’s now time to look at decreasing your tax rate.

Ownership structures, or how you choose to own your property, have a big part to play in minimising this amount of tax paid.

Because if you own your properties in the “wrong” way you will almost certainly overpay.

Usually, most investors will choose one of the following structures:

• Hold property in your own name

• Set up a trust

• Use a “look through” company (LTC).

Let’s go through a few examples to see how you could decrease your tax rate.

Own name → Trust

A trust is a separate legal entity, which owns assets on behalf of beneficiaries (usually you).

These can be useful for higher-income earners, since the top tax rate is 39% for any income earned over $180,000.

On the other hand, a trust’s tax rate is 33%.

So, if are a high-income earner and move your properties into a trust, your tax rate will fall from 39% to 33% (assuming you don’t immediately distribute those funds back to yourself).

This means on a property earning $10,000 in taxable profit, you could save yourself $600 in tax.

50/50 Ownership → look through company

A Look Through Company (LTC) can be extremely helpful as a restructuring tool because it takes on the tax rates of its shareholders.

By this we mean LTCs can be set up in a way so that a lower income earner can “earn” a greater proportion of the property’s profits. That way more of the income is taxed on the lower income earner’s tax rate.

Here’s a real life example of how this works with one investing couple.

In this situation, the wife is a partner at a large law firm and earns a bucket-load of money that is taxed at 39%. Her husband is a stay-at-home dad, earning nothing.

Now, if they owned their properties 50/50, half of their taxable profit would be taxed at 39%, the other at 10.5%. So all up they would pay about a 25% tax rate, when you average it out.

But by setting up a LTC all of a sudden 99% of the properties are owned by him. That means 99% of the taxable profit is taxed at a 10.5% tax rate. And only 1% of the taxable profit is taxed at a 39% tax rate. The effective tax rate is now just under 11%.

In this case if their portfolio earned $10,000 in taxable profit, they would save just under $1400 in tax every year. And that continues every ongoing year.

Owning your properties in the right entities

Streamlining your properties to be held within the same entity can help minimise your tax as well.

For instance, let’s say you have two properties. And let’s say that property A is making a taxable profit of $10,000, but property B is making a loss of $10,000.

From a cashflow perspective, it might seem like this investor is breaking even, so there’s no tax to pay.

But if the properties are owned in separate entities the investor still may have to pay tax.

Why? Even though you won’t pay anything on property B (as there was no profit), you still have to pay $3,300 in tax on property A (assuming a 33% tax rate).

In this situation, the more efficient tax structure is to transfer both those properties to the same entity – like a trust – so they offset each other. That way you have $10k coming in for one property and $10k going out on the other. There’s no taxable profit, so no tax to pay.

Do I really need a property accountant?

The key takeaway for investors here: There is a difference between the income you earn and the income taxed.

This article has discussed the main ways to minimise the amount of tax you pay.

• Decrease taxable profit through selective investing

• Decreasing taxable profit through non-cash costs

• Structuring your affairs to minimise your tax rate

But and this is a big but you won’t realise if there are opportunities to minimise your tax until you talk to a property accountant.

Any accountant can file your tax return, but it’s a very wise decision to use an accountant who specialises in property and can analyse your specific situation.

If you need a recommendation, Opes Partners has reviewed the Top 5 Property Accountants in New Zealand.