Understanding the IR10 for NZ Rental Properties: A Landlord's Guide

Owning a rental property in New Zealand is a fantastic way to build wealth. But as the end of the financial year approaches, you'll encounter various tax forms, including the IR3, and one in particular for co-owned properties: the IR10.

What is the IR10 Form?

The IR10 isn't a tax return in the traditional sense. Think of it as a financial summary or a report card for your rental property business. It details the total income and expenses for the property, but it doesn't calculate the final tax you need to pay.

You are required to file an IR10 form if your rental property is owned by:

• A partnership (e.g., you own the property with your spouse, a family member, or a business partner).
• A Look-Through Company (LTC).

Many people buy rental properties with a partner, which automatically creates a partnership for tax purposes unless a company is formed. An LTC is a special type of company where all profits and losses flow directly to the shareholders, behaving much like a partnership for tax.

The IR10 form simply shows the final profit or loss and splits that amount among the partners or shareholders according to their agreed-upon share.

Getting Your Ducks in a Row: Essential Information for the IR10

To complete the IR10 accurately, having organized records is crucial. If your records are tidy, the process is straightforward. If they're messy, it can be a significant challenge.

Here’s a checklist of the information you need to gather:

1. Income

   • Total rent received for the year.
   • Any other income, such as insurance payouts or tenant-paid fees.

2. Expenses

   You can reduce your taxable income by claiming all legitimate expenses. These include:

   • Council rates
   • Insurance premiums
   • Interest on the mortgage. Be careful with interest limitation rules: The ability to claim interest on residential properties has changed. For properties acquired after March 27, 2021, you generally cannot claim interest. For properties acquired before this date, the amount you can claim is being phased out.
   • Repairs and maintenance (for fixing things that are broken).
   • Property management fees.
   • Legal and accounting fees.
   • Body corporate or unit title fees.
   • Travel costs for property inspections (keep a detailed logbook).

3. Other Important Details

   • The IRD number for the partnership or LTC.
   • The IRD number for each partner or shareholder.
   • The agreed-upon profit share ratio (e.g., 50/50, 60/40).

Connecting the Dots: From the IR10 to Your IR3 Return

This is a critical two-step process. The IR10 is step one, and your personal tax return (the IR3) is step two.

Once the IR10 is completed, it will show a final net profit or loss. For example, let's say you and your spouse own a rental property together in a 50/50 partnership. After adding up all the rent and subtracting all allowable expenses, the IR10 shows the property made a net profit of $8,000 for the year.

The IR10 form will show this $8,000 profit is split:

• $4,000 attributed to Partner A
• $4,000 attributed to Partner B

When you each file your individual IR3 returns, you must include that $4,000 as part of your personal income, along with salary or any other earnings. You will then pay tax on your total income at your personal tax rate.

The same principle applies to losses. If the property had a net loss of $6,000, each partner could claim a $3,000 loss on their IR3 return, which can help reduce their taxable income from other sources.

Common Pitfalls to Watch Out For

Be aware of these common issues when managing your rental property's finances:

• Repairs vs. Improvements: This is a classic mistake. Fixing a leaky tap is a repair and is immediately deductible. Replacing the entire bathroom with high-end fixtures is an improvement. Improvements are capital expenses and are not immediately deductible, but they can be added to the property's cost base to reduce tax if you sell it later. When in doubt, talk to your accountant.
• Interest Limitation Rules: This is worth repeating because it's so important. The rules have significantly changed the financial landscape for many landlords. Do not assume you can claim all your mortgage interest. Check the IRD website or consult a professional to see how the rules apply to your specific situation.
• Don’t Forget to File: If you are required to file an IR10, it is not optional. The IRD knows your property is owned by a partnership or LTC and will expect to see the form filed each year.

Ultimately, the IR10 is an essential tool for summarizing your rental property's performance and correctly attributing the results to its owners. By keeping good records and understanding the key rules around expenses, you’ll find it a manageable part of your responsibilities as a landlord.