Making Money from Your House - Beany · BnB. Another pitfall to watch out for is the IRD treat...

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© Sue de Bievre, Beany.com 2020Making Money from Your House - The pitfalls and the prize

Some valuable advice from Sue de Bievre, CEO, Beany.com

The pitfalls and the prize

Making Money from Your HouseThrough Air BNB or Renting

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Letting out a room, a sleep-out or even the entire house to make some additional cash. Or maybe you have a bach which subsidises itself through Air BnB income? It is an excellent way to maximise the return from one of your main assets - your house.

But, and there’s always a but, the IRD want their share of your income and they may also want a share of your house when you sell it, if you’re not careful.

There are some real pitfalls which you need to know about so you can navigate around them.

Everybody is doing it, right?

Here are some of the main questions to think about

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Do I have to pay tax on the income collected from renting out a room or my holiday house?

Simple answer, yes. All income from Air BnB or similar has to be declared in your tax return. However, you can claim associated expenses against the income which reduces your tax bill.

If your rental property is only used for your business, all the expenses can be offset against your income.

Be aware as well that any expense which is fully related to the rental, such as advertising costs or Air BnB commision is fully deductible and any expense which is personal such as a new ensuite for your own bedroom is not deductible.

If your property is partly used personally and partly used for short term rental (mixed use), the calculation can be tricky.

1. If the house is separate from your personal home, like a bach, and it’s empty for a period of more than 62 days, then you claim the following:

a. Total Expenditure (see question below on what you can claim) x (Days Occupied by Air BnB customers/Total Days Used).

b. Total Days Used = Air BnB customers plus any personal use (you, family or friends)

Example One - your bach

You have a holiday home and you let it out for 4 weeks from mid Jan to Mid Feb and earn income of $300 per night for 28 nights plus another 10 nights through the year, a total of:

38 nights @ $300 = $11,400.

Additionally you stay there from Dec 26th to 15th Jan and you and your family and friends also stay for another 10 weekends throughout the year, so it’s occupied for another 40 nights.

You have the following expenses:

Interest on your mortgage $5,500

Rates $2,500

Insurance $1,500

Repairs and Maintenance $800

Cleaning $800

Power & Broadband $3,600

Total Expenses $14,700

You can claim 38/78 of this total = $7,161, against your income of $11,400.

Tax will be payable on $4,238 at your marginal rate.

Your marginal rate refers to the top tax rate that you are paying. If you earn $60,000, your marginal rate is 30%. If you earn $70,000, your marginal rate is 33%, for example. If you have no income, then your marginal rate will be a very reasonable 10.5%!

2. If the space you’re renting out is in your own home, then you can use a floor area calculation like this:

a. Total Expenditure x (Rented Floor Area/Total Floor Area

Confused? Let’s look at some examples.

Example Two - your own home

Every detail is the same in terms of income and expenses as per the above example except you are renting out a room in your home with a separate bathroom and kitchen. The floor area of this space is 40 sq metres and your total home is 150 sq metres.

You can claim 40/150 of your expenses = $3,920, against your income of $11,400.

Tax will be payable on $7,480 at your marginal rate.

This could create very different results. In example one, if you own a property and are not earning income elsewhere, you will end up with tax to pay of $444.09. In example two, if you are employed and being paid $75,000, then your tax bill would be $2,468.40 on exactly the same income and expenses.

And that’s why you need an accountant!

And you need to understand the different rules as you can structure your rental income in a way which legally minimises tax.

There are two ways of calculating the mixed use expenses you can offset against your Air BnB income.

“If your rental property is only used for your business, all the expenses can be offset against your income.”

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Do I have to pay GST as well?

The IRD considers all income from short term lets as commercial income (unlike a normal residential rent) so all rent collected is subject to GST if you collect more than $60,000 in a 12 month period. As soon as you hit this threshold (or expect to go over $60,000), you must register for GST.

This creates compliance costs for you as you will need to file a GST return at least twice a year - it can also create some serious repercussions when you come to sell your home.

What can happen is that your family home can be treated like an asset of your letting business and once you’ve registered for GST, you will have to pay the GST back when you either sell your home or even just stop using it for Air BnB.

Another pitfall to watch out for is the IRD treat family and friends staying for free at your holiday home as part of your rental income. What? This is completely different from the income tax calculation and makes no sense but here is an example:

A private bach valued at $450,000 is used for Air BnB and generates $40,000 in a year of income. You usually let it out at $500 per night. Your family and friends stay there for 41 days in one year for free.

Rental Income = $40,000

Deemed Rental Income = $20,500

You decide to stop renting it out because it wasn’t worth the hassle and the IRD decide you should have been GST registered and now want the GST back on the ‘change of use’ from commercial to private – they will want GST of $58,695 back.

In this example, you may not even be aware you have breached the threshold, but could be liable.

If you want or need to register for GST, you can call Beany and we’ll do it for you. Or you can call the IRD - they’ll tell you how.

Understanding what you can and cannot claim is the key to GST – If you are a Beany client, we offer a full GST service to make sure you always claim everything you are entitled to.

The IRD also provide some information on GST here.

But don’t despair, there is a clean solution to avoid the risk, see the next question.

Should I set up a company?

Yes, if you are going to go through the $60,000 threshold for GST purposes, we would strongly recommend this. You can run the business of your short term lets through the company and avoid any of the pain mentioned above.

You can allocate profit among the shareholders - there are some rules around this but typically it allows for more tax flexibility.

At Beany, we don’t charge any more to look after a company than a sole trader or partnership (but some accountants might charge more), and we can set it all up for you for $245 plus GST.

Or if you are comfortable with complicated forms and company rules, you can buy a company at Companies Office directly (www.companiesoffice.govt.nz/companies/).

Do I need an Accountant?

Having a good accountant means that you can avoid some of the nasty and unexpected outcomes from renting out a room or your holiday home.

Your accountant will make sure that all your expenses are correctly claimed and your income correctly declared so that you are paying not only the right amount of tax - but also the least amount of tax you need to.

It also gives you more time.

If you don’t have an accountant (tax agent), you must file your tax returns by 7 July after the year end. If you do have an accountant, the deadline is extended to 31 March of the following year.

Use your time and energy to focus on the productive parts of your business and leave about the compliance stuff, like preparing financial statements and tax returns, to your accountant.

At Beany we specialise in working with property investors and people making money from their real estate, making sure you are paying the least tax, and are prepared for the tax payments as they come up.

“Use your time and energy to focus on the productive parts of your business”

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What about bookkeeping?

This would be something to discuss with your accountant. Having no system will probably mean you either miss some of the income, or worse, miss some of your expenses. Although we would always recommend Xero software, it may be that you are operating at a low level and some other method might work as well for you.

Xero is the best on the market at present and is reasonably inexpensive (if you buy a cash book version through Beany). It will cost between $12 to $21 plus GST per month and it will give you:

• Knowledge about your business

• The ability to share information with the Beany team so we can help

• Online, secure information

If keeping your own books is a worrying prospect, for whatever reason, get someone else to do it for you, someone who knows what they are doing and enjoys it.

If you are a Beany client, we offer a specialised bookkeeping service for small businesses.

Check out www.beany.com/books for our options.

What can I claim as an expense in my business?

This should be easy, but can get complicated. And time consuming too.

You can claim any expense which is directly linked to the production of your business income.

The hard part is distinguishing what is directly linked. Your doctor’s bills are not, even though you need to be healthy to work. Neither are your gym costs, your golf club costs (entertaining, right? Wrong!) or your boat (“But I took a client out on it once last year”). The key words here are directly linked.

Common expenses related to rental income would be:

• Mortgage interest - the interest only, not the total repayments.

• Rates

• Insurance

• Repairs, Maintenance & Cleaning

• Commissions

• Power and Broadband

• Depreciation - you may need some help in distinguishing between what is an asset and what is an expense.

If you are a Beany client, we’ll make sure you always claim for all legitimate expenses.

The IRD also have some resources to help you determine what you can claim at this link.

“Having no system will probably mean you either miss some of the income, or worse, miss some of your expenses.”

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Do I need a separate bank account for my business?

Yes, you do. In fact, you really need two - one for your normal trading transactions and the other for your tax savings.

It makes life a lot simpler that way.

What kind of insurance should I get?

Depending on your business and your personal situation, you may need to consider a range of insurance options.

We don’t like to think about the worst case scenario, but things happen and it’s best to be prepared.

Talk to a good insurance broker who will discuss your needs and risks, and how best to cover them

How much should I save for tax?

As a VERY rough guide, we suggest you put 30% of the inwards cash (that is, all your rental income) into a savings account - and keep it there for tax time. You probably won’t need all that but then when you get the actual bill, you can go and buy some shoes or fishing gear with the leftover money – or keep it in the bank!

If you are a GST client with Beany, we can monitor your potential tax liability on a regular basis, and advise you accordingly.

Also check out the provisional tax question below, there’s a nasty catch for new business people.

What is provisional tax and how does that work?

‘Terminal’ tax (or the total tax your business has to pay each each) is calculated on the profit of your business for a year. It is payable one year and one week after the end of the year (so 31 March 2017 profit is taxed and must be paid by 7 April 2018). It’s the job of your accountant to make sure you’re paying the right tax at the right time.

Provisional tax is tax that the IRD ‘guesses’ is about right for the current year - and then get you to pay it in advance during the year so you don’t end up with a big lump sum due at once.

So tax for the year ended 31 March 2017 has to be paid in 3 instalments during that year (Aug 17, Jan 18 and May 18). The IRD calculation is based on what you earned in the previous year.

HOWEVER - what happens in reality is that the IRD don’t know your business exists until you file your first tax return… so then they want the tax for the first year AND the second year to be paid in the same 12 month period. It really stings, especially when you’re new to business.

This has been such a problem that the government is thinking of changing the rules so you can pay your provisional tax more easily along with your GST - but that is still in the pipeline.

If you are a Beany client, we’ll guide you through the whole process, and make sure you are not caught out by the Provisional tax trap.

What is a RealMe Login and why do I need one?

When you first visit the IRD or Companies office online, you have the chance to set up a RealMe login.

This is the simple, one-fits all login for government websites, so saves time and having to register for different sites.

And you can keep an eye on your tax and company records whenever you want.

“If you are a Beany client, we’ll guide you through the whole process, and make sure you are not caught out by the Provisional tax trap.”

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Are you going to employ people?

This is a big call and requires a lot of administration so if you’re new to business, make sure you understand your responsibilities as an employer.

You will need to register as an employer with the IRD and purchase some payroll software which can calculate your employee’s pay and the amount to pay the IRD each month. You can find out more here.

There are lots of different types of payroll software. You can add it on to your Xero file.

Don’t forget that you will need employment contracts for everyone, signed before they start (very important, this one). You can build your own contracts using this link.

Beany can help you choose the best payroll software for your business, manage your PAYE returns and Kiwisaver schemes.

Are there any industry specific regulations?

Every industry has its own challenges and requirements so make sure you learn about these during the set-up phase. You can visit this link for specific sectors.

Contact [email protected] or call us on 0800 755 333 for any questions about this information or if you want to find out more about the services that Beany offers.

So to recap, what are the common pitfalls for people new to short term letting?

Not claiming all the expenses that you can and paying too much tax

Not accounting for your income correctly and being pinged by the IRD for unpaid tax, penalties and interest

Unintentionally catching your home in the GST net and having to give the IRD a chunk of its value on sale or change of use.

Not using technology to make things easier - use technology to work smarter!

Not understanding your strengths and weaknesses. Do what you’re good at and find someone else to do the stuff you’re not good at. Do not ignore the stuff you’re not good at - deal with it by getting someone else to do it. And say thank you when they do!

Being afraid or embarrassed to ask for help or asking questions. No one knows everything, so seek out advice from wise people and use it.

Making Money from Your House - Beany · BnB. Another pitfall to watch out for is the IRD treat...

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