As the country heads away on summer holidays, investors often contemplate the addition of a holiday home or bach to their portfolio. With the relentless rise of Airbnb as a means to derive casual rent from the bach and still gain personal use of it continues, tax, GST and consent issues associated with casual letting of holiday homes need to be considered carefully.

Consent

There has been strong lobbying from commercial accommodation providers to see those people casually renting holiday accommodation treated more like their commercial cousins. This has led some, but not all, councils to review the way they rate holiday homes that are rented, often with rates significantly increased depending on the amount of nights a home is rented. Check with your local council to determine the rules in your chosen area.

Goods And Services Tax

The provision of short-term is a taxable activity for GST rather than an exempt activity like residential renting. Registration is compulsory if the rental income is likely to exceed $60,000 and voluntary below that. And believe me, there is an increasing number of holiday homes rented in New Zealand that derive more than $60,000 per year in casual rent.

However, if the casually let bach is introduced to an entity that is already GST registered, it must be included in the entity’s taxable activity even if its rent is below $60,000.

This sometimes necessitates a standalone entity if you wish to exclude the property from the GST net.

Be careful about changing the use of a holiday home you have owned for a long time to rental activity; if the owner is GST registered and the property must be in the GST net, GST can only be recovered on its original cost but will be payable on disposal on its full market value. This alone can render a renting exercise uneconomic.

Income Tax

Holiday homes that are both rented and enjoyed privately are subject to the mixed-use asset rules. These rules require records to be kept of the actual use of the property, both commercially and privately. Deductibility of costs is now possible only in the ratio of rented nights over total nights occupied. For example, if the bach is rented 25 nights and used privately 50 nights the ratio is 25/75, and costs related to both rented and private use will only be 33% deductible. It is no longer possible to claim a deduction for the nights the property is vacant, but available to rent. There are also restrictions on claiming rented nights where associated persons to the owner are renting the house and also restrictions where rent is discounted for friends.

Having determined the deductions, there is one final hurdle to jump before a loss can be claimed. To be able to offset a loss against other income, the gross rent collected from the bach must be more than 2% of the Government Valuation (GV) of the property. So, if the rent is below this threshold, the loss is ring-fenced.

The upside to this ring-fencing though, is that because it is already addressed within the mixed-use asset rules, it is not subject to the ring-fencing rules associated with the renting of residential land. So, if the rent jumps the 2% of GV threshold, but the property still makes a loss, the loss can be offset against other income.

Bright-Line

It is likely that the holiday home will not be your main home. So regardless of whether it is rented out or simply available privately it will be subject to the five-year bright-line rule. This means that if it is sold within five years any gain will be taxable.

Lastly, global warming is now affecting the global risk profile for insurance. Waterfront properties that are close to lakes, rivers and the sea are becoming more difficult to insure. Before calling any contract unconditional, make sure that you can get cover for it, especially if you must borrow money against it, as banks will not lend money against property that isn’t insured.