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Owning a residential rental property can be a lucrative investment, providing a steady stream of income for property owners as well as long term capital growth. However, when it comes to tax considerations, the type of rental income—short-term or long-term—can significantly impact your financial obligations.

Whether you are a short or long-term rental property owner in New Zealand, you must report your earnings on your annual income tax return. It’s crucial to keep accurate records of all income and related expenses to calculate the taxable profit correctly. However, there are differences in tax considerations between short-term and long-term rental income for property owners. We look at these key distinctions below.

Understanding short-term rental income

Short-term rentals or holiday rentals, often facilitated through platforms like Airbnb and Bookabach, have gained popularity in recent years.

While short-term rental can offer higher rental rates and increased flexibility for property owners, there are some different expense and tax considerations.

1. Expense deduction: Property owners can claim deductions for various expenses related to their short-term rental, such as advertising, maintenance, cleaning, utilities, insurance and depreciation on chattels.
2. Mixed use: Mixed use tax rules may apply to calculating income and expenditure depending on the type of property (for example, renting out a room in a house, whole house, sleep-out, cottage or second home etc) and its use (available to rent full-time versus part-time).
3. GST: If your short-term rental income exceeds the GST registration threshold (currently $60,000), you may be required to register for GST. This entails collecting GST on the rental income but also allows you to claim back GST on related expenses. Keep in mind that, if you sell your rental property (or change its use), you will need to return GST output tax on the sale price.

Note that GST rules for short term rental property are set to change 

More about tax and short term rental income 

Long-term rental income tax considerations

Long-term rentals, characterised by stable, continuous occupancy, also come with specific tax considerations that property owners should be aware of.

1. Expense deductions: Like with short-term rentals, long-term rental property owners can claim deductions for related expenses, such as maintenance, insurance and chattel depreciation.
2. Mixed use: Apportionment rules will apply to long term rentals if you rent out a room, sleepout, or just part of your house.
3. No GST implications: Unlike short-term rentals, long-term rental income is exempt from GST in New Zealand and hence does not have GST implications. Property owners do not need to register for GST, and there is no GST collected on rental income.

More about expense deductibility for both short-term & long-term

Ringfencing excess deductions

If your expenses are more than your residential rental income, you generally cannot offset excess deductions against other income in your tax return such as salary or wages. You’ll need to carry the excess forward into the next tax year you earn .

More about ringfencing rental losses

Interest deductibility

Unless you own a new build or houses rented as social housing, mortgage interest is not a fully tax-deductible expense although there are a few technicalities.

The current rules are:

• There is some tax deductibility for mortgage interest on properties purchased before 27th March 2021; however this interest deductibility will be phased out over time.
• There is no interest deductibility on properties purchased on or after 27th March 2021.

Under the new National government, we are likely to see a phased reintroduction of interest deductibility on, perhaps starting in 2024, watch this space.

Choosing the Right Strategy

Whether you’re venturing into short-term or long-term residential rental property ownership in New Zealand, being well-versed in the associated tax considerations is key. Consultation with a qualified tax professional is recommended to ensure compliance with the ever-evolving tax regulations and to optimise your financial outcomes as a property owner and enjoy a successful and rewarding investment journey. Get in contact if you would like to know more.