Sharing accommodation with flatmates can be a great way to reduce living expenses and enjoy some company. However, it’s important to be aware of the tax obligations that come with renting out parts of your home. In New Zealand, how you manage these obligations can vary based on whether you’re simply sharing costs or earning a profit from your flatmates. Here’s a guide to help you navigate these responsibilities.
Flatmates vs. Tenants: What’s the Difference?
In most flatting situations, payments made by one flatmate to another as a share of the overall cost of accommodation are not likely to be classed as taxable income. This means that if you and your flatmates are equally splitting the rent, bills, and other expenses, you typically don’t need to worry about declaring this money as income.
However, if one flatmate (usually the homeowner or main tenant) aims to profit from the contributions of others, this profit is considered taxable income. For instance, if you charge your flatmates more than their fair share of the rent and pocket the difference, that extra income must be declared.
When to Declare Income
If you’re in a situation where you’re making a profit from your flatmates’ contributions, you need to declare this income using the ordinary tax rules. This involves reporting rental income and deducting allowable expenses to determine the taxable amount.
Similarly, if you live in a property and have other tenants living in a separate part of your multi-flat building, you must declare your rental income.
Calculating Expenses
To figure out which expenses you can claim against your rental income, you can use one of the following methods:
Specific Expense Method: Keep a record of the expenses that relate directly to the part of the property you’re renting out, and claim these costs against your income. This could include a portion of the mortgage interest, rates, insurance, and maintenance costs specifically associated with the rented area.
Apportioned Expense Method: Keep a record of your total expenses for the entire property and apportion these according to the area of the rented-out part. For example, if you rent out a flat that takes up a quarter of your house, you can claim 25% of the overall house expenses. This method ensures you’re fairly splitting costs between personal and rental use.
Keeping Accurate Records
Maintaining clear and accurate records is essential. Document all rental income received and the associated expenses. This not only helps in accurately calculating your taxable income but also ensures you have the necessary documentation in case of any tax inquiries.
Conclusion
Understanding and meeting your tax obligations as a flatmate or landlord is crucial. Whether you’re simply sharing costs or earning rental income, knowing the rules helps you stay compliant and avoid any surprises at tax time. For more detailed information, visit the Inland Revenue website or consult a tax professional.
By staying informed and organized, you can enjoy the benefits of shared living without any tax-related headaches.