While we are living & working overseas (currently in Canada) we are renting out our home back in New Zealand so as to at least cover the interest on our mortgage.

With tax return time approaching in NZ - the New Zealand tax year runs from 1st April to 31st March of the following year, and returns must be filed by 7th July - one of the additional calculations this year will be to account for the extra rental income. I already do the returns for our investment property myself so this was supposed to be easy. But the other day I read an article in the NZ Herald - “Traps in renting out your house“. There was a paragraph that caught my eye:

“First, you’ll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.
And you won’t be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.”

Whooaa! This would mean that any mortgage interest we’d paid while renting out our home would not be deductible leaving us to pay tax on the full rental income received! That would have been 000’s of dollars in our case - Screwed! We expected the rental income to cover our interest expenses while away.

This didn’t sound right so I asked about it on Propertytalk.com. Surely enough the readers pointed out that the article was incorrect. In short:

“The test for deductibility is, is the expense incurred, while deriving taxable income.

The rental income is taxable, the expense of the mortgage is incurred while deriving that taxable income, therefore the mortgage expenses are deductible.“

Naturally you cannot claim the interest if you’re still living in the house but for all you going overseas and thinking of renting out your house - breathe a sigh of relief, and never trust a journalist.