In residential property investment, a mixed-use asset refers to a property that serves both private and income-earning purposes, and is unused for 62 days or more during the tax year. This means the property is used personally by the owner for part of the time, vacant part of the time, and rented out to generate income for the remainder, e.g. a holiday home that is rented out on Airbnb for part of the year and used by the owner or their family for personal holidays during other times.
The classification of a property as a mixed-use asset is important for tax purposes. Specific rules govern the calculation of deductible expenses based on the proportion of time the property is used for income generation versus private use. These rules ensure that only the expenses related to the income-earning portion of the property are deducted, while the expenses related to private use are not.
Mixed asset calculations
Here’s a step-by-step guide to help you calculate expenses accurately:
Step 1: Identify the number of days the property was:
- Used for earning income (rented out)
- Used privately
- Unused
Step 2: Add up all expenses related to the property. These may include:
- Mortgage interest (see special considerations below)
- Rates
- Advertising
- Insurance
- Repairs and maintenance (see special considerations below)
- Utilities
- Other relevant costs
Step 3: Categorise expenses into fully deductible, non-deductible and apportioned.
Fully deductible expenses are those that relate only to the asset’s income-earning use, for example, the cost of advertising for guests for your holiday home. These expenses are 100% deductible.
Non-deductible expenses relate to the asset’s private use and can not be claimed as a deduction. For example, the cost of a quad bike stored in a locked garage and unavailable to the people renting your holiday home.
If an expense relates to both income-earning use and private use, you need to apportion the expense, which is explained in the next step.
Step 4: Expenses are apportioned based on the days the property was used for income-generating purposes and the total number of days it was used. The formula is:
Deductible apportioned expenses = total apportioned expenses x (income-earning days / total days used)
Example calculation
Property use:
- Income-earning days (number of days rented): 100
- Private use days: 50
- Unused days: 215
- Total days used: 150 (100 income-earning + 50 private)
Total annual apportioned expenses:
- Rates: $4,000
- Insurance: $1,500
- Repairs and maintenance: $3,000
- Utilities: $1,500
- Total: $10,000
Deductible apportioned expenses = $10,000 x (100/150) = $6,666.67 (or 66.67% of total apportioned expenses)
Special Considerations
- Mortgage interest deductions – special rules apply and have recently changed – see more here.
- Repairs & maintenance – large repairs may need to be capitalised and depreciated – see more here.
Recommendations
- Maintain accurate records of all income, expenses, and usage days. Detailed documentation is crucial in case of an audit by the IRD.
- Consider using accounting software to track expenses and consult with a tax professional to ensure compliance with current tax laws and regulations.
Get in touch
Accurately determining the usage and appropriately apportioning expenses can be complex. If you need assistance please don’t hesitate to get in touch.
