Deductibility of expenses on rental properties is quite clear but not so with properties partially used for private purposes, such as “baches” or holiday homes. Taxpayers often want to claim partial deductions for expenses (interest being the largest) for the period holiday homes are let out.
Until recently, the Inland Revenue had allowed the property owner to claim a proportion of the expenses for the period the holiday home was carrying on a business activity provided there was a sufficient nexus between the expenses and the rental activity. This will change if the Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill is legislated which has targeted deductions for mixed use assets such as holiday homes.
The Bill proposes that if a holiday home:
• is rented out on a short term basis to earn income;
• is also used privately; and
• is unused for at least two months in an income year.
Then it will be subject to the rules proposed.
Simply put, the proposed rules state that the expenses claimable will be calculated in proportion of the income earning use to the total use (i.e. private use plus income earning use). However, as they say the devil is in the detail with specific rules governing the apportionment calculation. If the Bill proposal is legislated, it will apply from the 2013-2014 income year. Watch this space in future.
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Client Newsletter. Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.