How to Pay $0 Tax on Rental Income: Using IRD's Renting to "Family Members" Rule

Renting a holiday home to a family member can mean the income is Exempt, resulting in $0 tax to Inland Revenue.

What is Exempt income?

Exempt income is income you do not have to pay tax on. If you qualify, you can:

Treat your rental income as exempt.
Avoid reporting the income or expenses for that year.

What is the IRD Rule?

The rule is called the Associated Person Exemption (for Mixed-Use Assets).

This rule applies regardless of the amount of rent charged. Even if your family member pays full market rent, the income is still exempt if the property qualifies.

The renter can be any “associated person”. By definition, an associated person includes most close relatives connected by blood, marriage, civil union, or adoption.

Common examples include:

Your children, parents, and siblings.
Grandchildren and grandparents.
In-laws.

If the property is owned by a trust, rent from beneficiaries or settlors is also typically treated as coming from associated persons.

Why this rule exists

Under the mixed-use asset rules, any use of the property by the owner or their close relatives (“associated persons”) is automatically classified as “private use”.

Because it is defined as private use, any income received for that use is treated as exempt income by the law.

The simplicity for the taxpayer is a welcome outcome of this clear legal distinction between private and commercial use.

What is the catch?

For this rule to apply, the property must be a “mixed-use asset”, not just any type of property.

The most common type of mixed-use asset is a holiday home, because the property must be:

● Used partly for deriving income and partly for private use; and

● Unused for 62 days or more in the income year.

What if the Property is not a Mixed-Use Asset?

If your property does not meet the Mixed-Use Asset criteria (for example, it is a long-term residential rental), the standard tax rules apply. In that case, if you charge below-market rent, your deductions are generally limited to the income you receive, which can also result in a $0 tax profit.

My Advice: Practical Considerations

1. Formal Agreements: Even with family, it is highly advisable to have a formal tenancy agreement in place. This clarifies expectations regarding rent, maintenance, and property use, protecting both the relationship and your asset

2. Keep Good Records: Always maintain clear records of who used the property, for how long, and the rent paid. This is essential for correctly applying the mixed-use asset apportionment formula for periods when the property is rented to non-family members

3. Beware the Bright-Line Test: The main home exclusion from the bright-line test only applies if the owner lives in the property. If you sell a property that has been lived in exclusively by a family member, it will not qualify as your main home, and any gain on sale could be taxable.

The Final Takeaway: The Critical Trade-Off

The trade-off for receiving exempt income is that you cannot claim any deductions for expenses related to that rental period.

This means costs like mortgage interest, rates, insurance, and repairs cannot be claimed against the income received from your family member. The rental activity is effectively removed from your tax return for that period, resulting in a net tax position of zero. Crucially, because you cannot claim the expenses, you cannot generate a loss to carry forward against future profits.