10 Property Tax Mistakes That Cost Thousands (And How to Avoid Them)

Most New Zealand property owners overpay their taxes. In this article, you will learn how to minimise your tax burden, ensure Inland Revenue compliance, protect yourself from costly errors, and save yourself thousands of dollars along the way.

I will cover:

• The 10 most common property tax mistakes Kiwis make; and
• How to avoid them.

By the end, you’ll walk away with clarity on the basics of property taxes in New Zealand, what mistakes to avoid and how to minimise your tax payments.

Mistake 1. Not getting the basics right (bad record-keeping)

You must keep business records for a minimum of 7 years. Here are common mistakes I see with understanding your record-keeping requirements:

• It’s not actually 7 years, its longer.

You need to keep sufficient records for a minimum of seven years after the end of the income year to which they relate (normally 31 March), and even if the business ceases operating. Which basically means that its actually more than 7 years in most cases. This can sometimes be even longer (up to 10 years) for specific situations, such as if you are under audit or investigation. The 7-year rule is on a rolling basis. So don’t make the mistake of throwing out all past records in your 8th year of business.

• Bank statements are not sufficient on their own.

Bank statements are an important part of business records, but they may not be sufficient on their own to meet the record keeping requirements. For a property investor with a rental property, the records you need would typically include:

1. Rental agreements with tenants.
2. Records of rental income received.
3. Mortgage documents and loan statements.
4. Sale and purchase agreements (SPA) for your property.
5. Invoices and receipts for expenses related to the property, such as repairs, maintenance, property management fees, and insurance.

• Not maintaining proper business records could lead to financial consequences.

For example:

1. Loss of deductible expenses. Because they cannot be substantiated due to missing records.
2. Reduced insurance payouts. In the event of damage to a rental property, without proper records of the property’s condition and the assets within it, you may find it difficult to substantiate claims.
3. IRD audit and penalties. If an Inland Revenue audit finds inadequate records, you, may face penalties for non-compliance. Additionally, the IRD may make adverse assessments based on available information, which could be less favourable than if accurate records were provided.

The solution

Consider using a good accounting system. It will help you meet your record keeping requirements. It could be a simple Microsoft Excel spreadsheet and a cloud storage system such as Google Drive, or a more completely cloud-based system, such as Xero.

Mistake 2. Filing your tax returns late and making late tax payments

Don’t make the mistake of filing your tax returns late, or making late tax payments to the IRD.

• The interest charged can be significant, often much higher than bank mortgage rates. The overall impact of interest and penalties can often cost you more than the core tax itself.
• Plus, your future ability to get any form of tax relief from the IRD could get severely restricted due to your past compliance record.

But also don’t overpay tax either. IRD refunds include interest, but at a lower rate than you’ll get in a savings account.

Mistake 3. Not understanding how property taxes work.

Do you pay any tax if you spent more than you earnt?

If your bank account is lower at the end of the year compared to the start of the year, it appears absolutely unfair that you would have to pay taxes.

But here’s the thing…

Just because you are cash-flow negative, it does not mean that you don’t have to pay taxes. This is because there is a difference between cash-flow and net profit in the eyes of the IRD.

You pay taxes on the net profit, not cash-flow. I call this being ‘cash-flow negative’. This is, in fact, very common among landlords. I highly recommend that you learn the basics yourself in the short term. And enlist the help of a professional as you grow.

Make sure you also know the answers to other common questions such as:

• Is your first year-tax free?
• When do you register for GST?
• What property taxes do you pay?
• How to pay the right amount of tax?
• Does your tax structure affect the tax you pay?
• How to know whether your property is residential, commercial, or mixed-use?

I cover the answers in-depth to all the above questions in Chapter 3 of my guide.

Mistake 4. Having the wrong tax structure.

Do not get your tax structure wrong, It’s like building your house on a weak foundation, and can be costly in the long run.

There are 5 common structures available for owning property and running a business, being:

• Sole or direct ownership
• Partnerships
• Joint ventures
• Companies (including LTCs), and
• Trusts.

Other ways to own property also exist. Understanding the key differences between each structure and the benefits they offer is an important part of laying the foundations of property ownership, particularly if you plan on building a portfolio.

Each tax structure has a range of advantages and disadvantages, making them suitable for different circumstances.

To choose an option that best meets your tax planning strategies, align the structure with your own goals and risk tolerance. In my full guide, I talk about the:

• Characteristics of the common structures,
• Advantages and disadvantages of each structure
• 8 examples of when each of the common ownership structure might be suitable.

Here’s my easy 7-step process to choose the right structure

𝗦𝘁𝗲𝗽 𝟭: 𝗗𝗲𝗳𝗶𝗻𝗲 𝘆𝗼𝘂𝗿 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗴𝗼𝗮𝗹𝘀. Ask yourself – what are you aiming for? Are you planning to hold the property long-term for rental income, or are you hoping to flip it for a quick profit? Start by clearly outlining your financial goals.

𝗦𝘁𝗲𝗽 𝟮: 𝗥𝗲𝘀𝗲𝗮𝗿𝗰𝗵 𝗽𝗿𝗼𝘀 𝗮𝗻𝗱 𝗰𝗼𝗻𝘀 𝗼𝗳 𝗱𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲𝘀. Understand the tax impact of different structures. It’s important to know how each tax structure works.

𝗦𝘁𝗲𝗽 𝟯: 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱 𝗮𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲𝘀 𝗮𝗻𝗱 𝗱𝗶𝘀𝗮𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲𝘀 𝗼𝗳 𝗲𝗮𝗰𝗵 𝘁𝗮𝘅 𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲. Consider key tax rules like the bright-line test and ring-fencing rules. For example, remember ring-fencing rules limit the ability to offset rental property losses against other income.

𝗦𝘁𝗲𝗽 𝟰: 𝗔𝗹𝗶𝗴𝗻 𝘁𝗵𝗲 𝘀𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲 𝘄𝗶𝘁𝗵 𝘆𝗼𝘂𝗿 𝗼𝘄𝗻 𝗴𝗼𝗮𝗹𝘀 𝗮𝗻𝗱 𝗿𝗶𝘀𝗸 𝘁𝗼𝗹𝗲𝗿𝗮𝗻𝗰𝗲. Your tax structure should align with your long-term financial goals and how much risk you’re willing to take. For instance, if you want to limit personal liability, a company or trust might be a better option than individual ownership.

𝗦𝘁𝗲𝗽 𝟱: 𝗘𝘃𝗮𝗹𝘂𝗮𝘁𝗲 𝗰𝗼𝗺𝗽𝗹𝗶𝗮𝗻𝗰𝗲 𝗰𝗼𝘀𝘁𝘀. Each structure comes with its own compliance obligations and costs. A company or trust might give you more flexibility, but they also require higher accounting and legal fees. Make sure the structure you choose is affordable and right for your situation.

𝗦𝘁𝗲𝗽 𝟲: 𝗦𝗲𝗲𝗸 𝗽𝗿𝗼𝗳𝗲𝘀𝘀𝗶𝗼𝗻𝗮𝗹 𝗮𝗱𝘃𝗶𝗰𝗲 𝘁𝗼 𝗲𝘃𝗮𝗹𝘂𝗮𝘁𝗲 𝘆𝗼𝘂𝗿 𝗼𝗽𝘁𝗶𝗼𝗻𝘀 𝘁𝗵𝗼𝗿𝗼𝘂𝗴𝗵𝗹𝘆. Tax law is complex, and property ownership can bring unexpected challenges. Consulting a professional can ensure you don’t overlook important aspects and that your structure is right for your situation.

𝗦𝘁𝗲𝗽 𝟳: 𝗙𝗶𝗻𝗮𝗹𝗶𝘀𝗲 𝘆𝗼𝘂𝗿 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻. After thorough research and seeking advice, choose the structure that best supports your goals. This will set a strong foundation for your property investment.

Personalised advice is outside the scope of this article. If in doubt to your specific situation, please feel free to reach out to me for a Strategic Consultation, and I will help you make the best decision for your specific situation.

Property owners commonly come to me for advice after they’ve already purchased their property. The best time to get advice is before you make that purchase.

Mistake 5. Not knowing the ‘Intention’ rule.

Generally, if you buy property with the intention or purpose of reselling it, you’ll have to pay tax on any profit you make from its sale. This is called the Intention rule.

It applies to both commercial and residential property, so you need to think about your intentions when you first buy a property. What you intend to do with it will determine your tax when you go to sell. This usually does not apply to your main home or if you bought the property as a long-term rental investment.

This is not a new rule. The rule has its origins as far back as 1973 to address issues identified by the Taxation Review Committee in its 1967 report. However, it has evolved over time, with the core concept remaining the same over the years.

IRD defines the Intention rule as follows: “When a property has been bought with the intention of resale, you’ll have to pay tax on any profit from the sale. The intention to sell does not need to be the main reason for buying the property. It could be one of several reasons.”

The solution

Documentation is king. Keep records of all correspondence that clearly states your purpose or intention at the time of purchase. This could make or break a future tax investigation.

Remember, the intention rule applies no matter how long you keep the property before selling it. It applies even before the bright-line test. See Mistake 6.

Mistake 6. Not understanding the ‘Bright-Line’ Rule.

If you sell a residential property, any profit will be taxable if it is sold within a set period of time (the bright-line period), unless an exclusion or rollover relief applies. This also applies to New Zealand tax residents who buy and sell overseas residential properties.

The Bright-Line rule explained

The bright-line period begins with the bright-line start date and ends with the bright-line end date.

• For a standard purchase of property, the bright-line period starts from the date the property’s title is transferred to you (generally the settlement date).
• For a standard sale, the bright-line period ends when you enter into a binding sale and purchase agreement to sell the property.

Different rules apply for other types of purchase (for example off the plan) and for other types of sale or disposal (for example when property is gifted).

For property sold on or after 1 July 2024, the bright-line test looks at whether your bright-line end date for the property is within 2 years of your bright-line start date. For property sold before 1 July 2024, different timeframes apply.

The big problem with this rule

The big problem is the constant changes. The IRD had changed the bright-line period 4 times over a 9-year period. That’s more times than we’ve had changes in government over the same period!

Here’s a breakdown of the timeline:

1. First introduced in the year 2015 with a 2-year bright-line period.
2. The bright-line was then extended to 5 years in 2018.
3. It was further extended to 10 years in 2021.
4. Now, it’s back to 2 years for property sold on or after 1 July 2024.

Mistake 7. Not maximising your deductions, especially interest deductibility

For most, your single biggest expense is interest.

Learn about claiming expenses, especially interest deductibility to maximise your cash flow.

Because it’s not what you earn that matters; it’s what you keep.

Here are 4 important changes to interest limitation rules that you need to know.

1. Phased interest deductibility. Claiming interest as an expense for residential property in New Zealand is being phased back in. From 1 April 2024, you can claim 80% of the interest incurred on funds borrowed for residential property, regardless of when the property was acquired or when the loan was drawn.
2. Full deductibility in 2025. Starting 1 April 2025, interest deductibility has been fully restored, allowing you to claim 100%. Though you won’t feel the impact until filing your tax return in 2026.
3. When you sell property. If your property is taxable under the bright-line property rule or other land sale rules, previously disallowed interest can be included as part of the property’s cost in the year of sale.
4. Disallowed interest between 2021 and 2024. Any interest deductions that were previously disallowed between 1 October 2021 and 31 March 2024 will remain disallowed, unless the property is sold and subject to tax.

In my full guide, I talk about other common mistakes when claiming expenses and a list of the other common, expenses you can deduct from your rental income.

Mistake 8. Overstepping the line with expense claims.

If you overclaim, and later the IRD disallows the expense, not only will you end up paying a higher tax, but also interest and penalties on the underpayment. This can add up to thousands over time, not to mention the potential greater scrutiny down the line with you being on the IRD’s radar each year.

• Learn the art of claiming the right amount to keep your tax strategy both legal and effective.
• Understand how to distinguish between legitimate deductions and over-claiming.
• Ensure you fully understand what counts as a deductible expense for your rental property.
• Distinguish between allowable operating expenses, like repairs and routine maintenance, and non deductible capital improvements or personal costs.

Some basic rules

1. You cannot claim deductions for private expenses, capital expenses or unrelated expenses
2. Capital expenses include buying a capital asset or increasing value of an asset
3. Private expenses are are those you buy, pay for, and are for your own benefit, rather than to generate rental income.

Common expenses that you cannot deduct

• Capital expenses
• The purchase price of the rental property
• Depreciation on the rental’s land or buildings
• The principal portion of mortgage repayments
• Your time when you do repairs and maintenance work
• Costs of making any additions or improvements to the property
• Real estate agent fees charged as part of buying or selling the property
• Cost of repairing or replacing damaged property, if the work increases the property value
• Legal fees involved with selling the rental property, unless you’re in the business of providing residential rental accommodation.

Mistake 9. Trying to do everything yourself

Most property owners and investors are entrepreneurs at heart, so there’s a natural tendency to try to do everything yourself.

But as anyone who has run a business will tell you, wearing too many hats is where the problems start. This means not building a great team around you. Build a great team of at least the following:

• Lawyer
• Accountant
• Mortgage broker
• Real estate agent
• Property manager

Mistake 10. Missing out on property specific accounting expertise.

Would you go to a GP for heart surgery?

Most accountants are generalists, which means they know a little about a lot of things.

A bit like your GP.

Don’t get me wrong. GPs are great for the small stuff.

But you wouldn’t want one doing your heart surgery.

Key Takeaways

When’s the best time to engage an accountant? Before you even start. The number of people who wait until an IRD audit letter arrives… it’s enough to make your head spin. There are only two certainties in life: taxes and death. You can’t avoid either, but you can manage one with the right help.

Baqir Hussain, FCCA

Director, Finex Chartered Certified Accountants