If you earn rental income, such as from long-term tenants or a spare room on Airbnb, this step-by-step article is for you. This article will take you through what rental tax is, how it works and how you can use Solo to simplify and master your rental tax return.
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What is rental income?
Rental Income is income from your rental property or a flatmate in your home. There are two main types of rental income:
Long-term: Income from renting out your residential property or part of a property for more than 4 consecutive weeks. This could be a rental property or a flatmate in your home.
Short-stay: Income from renting out your residential property or part of a property to guests for up to 4 consecutive weeks at a time. This includes payments from short-stay rental services such as Airbnb or Bookabach.
The key difference between long-term and short-stay income is how they relate to GST. Long-term income is exempt from GST, you do not need to register for GST or file GST returns and you cannot claim GST on rental expenses. However, if you earn more than $60,000 of short-stay rental in a 12 month period, you need to register for GST, include GST in your prices and file GST returns.
Do I have to pay rental tax?
Income tax: Generally, all payments received from renting out property are considered income and are subject to income tax in the year they are earned. Solo automatically calculates your rental income tax based on the rental income and expenses you categorise.
GST: GST only applies to short-stay rentals, and only if you are registered for GST. Long-term residential rental income is exempt from GST, regardless of if you are GST registered. Solo will automatically calculate GST on your rental income if you select the 'Short-stay (Airbnb)' rental type in your settings and you have GST enabled. Otherwise your rental income and expenses will be excluded from Solo's GST calculations.
ACC: Rental income in New Zealand is generally considered passive investment income and does not attract ACC levies. Solo automatically excludes your rental income and expenses from ACC calculations.
Do I need to register for rental tax?
You don't need to register for rental tax, or even as a sole trader. Simply start earning rental income and, at the end of your first tax year, file an income tax return.
To file an income tax return you will need a personal IRD number, which you will already have if you've ever working in New Zealand, and a myIR account.
If you don't have an IRD number you can apply for one online. You can also register for myIR online.
How do I calculate rental tax in Solo?
To calculate rental tax in Solo, first enable rental income in your settings:
Go to the Settings page in the main menu.
Toggle on Enable rental income.
Select the Rental type that is most relevant to your situation. Some rental types will have additional settings regarding rental expenses.
Set your Property ownership percentage. Solo will automatically split your rental income and expenses according to the percentage. E.g. if you own the property 50/50 with a partner then enter '50' %. Enter '100' % if you are the sole owner.
Save your settings.
When you toggle on enable rental income, Solo will display additional income and expense categories for your rental transactions, and add an additional form (IR3R) to your tax return.
More info: How to configure your settings
1. Categorise your rental income transactions
To accurately calculate your rental tax, Solo needs to know how much rental income you have earned.
You can enter your income (and expenses) into Solo by either connecting your bank account, uploading a transaction file or manually entering transactions.
Once your transactions are in Solo, then categorise your rental income transactions:
Go to the Income page in the main menu.
Select the Rental Income category for your income transactions.
Click the round tick ✅ button to save the transaction.
The transaction will then be moved from the 'Uncategorised' tab to the 'Income' tab and be included in Solo's income tax calculations (and GST calculations if relevant).
Note: Categorise all of your rental income transactions since the beginning of the financial year (1 April) so that Solo can calculate your income tax for the year.
More info: How to categorise your income
2. Claim your rental property expenses
To claim your rental expenses:
Go to the Expenses page in the main menu.
Select a Rental Property category for each expense transaction.
Click the round tick ✅ button to save the transaction.
The transaction will then be moved from the 'Uncategorised' tab to the 'Expenses' tab and be included in Solo's income tax calculations (and GST calculations if relevant).
Note: Categorise all of your rental expense transactions since the beginning of the financial year (1 April) so that Solo can calculate your income tax for the year.
More info: How to claim expenses
More info: Which expense can I claim?
How to file and pay an income tax return
When an income tax period becomes due:
Go to the Taxes page in the main menu.
Click on the File & Pay button for the due period.
Note: The 'File & Pay' button will only be displayed once the period is due. If a period is currently active, but not yet due, you will see a 'Preview' button instead.
To file a tax return for the previous financial year, simply categorise an income transaction for that year and the income tax period will appear.
Next, follow the instructions that are shown when you click the 'File & Pay' button:
1. File your income tax return
When your tax return becomes due you need to login to your myIR account and file your return using the figures that Solo has calculated. This might seem like a lot of steps but really you just need to copy a few figures from Solo. Once you've done it the first time it's really simple.
To file your income tax return:
Log in to myIR.
Click Returns and transactions under 'Income tax' in your summary.
Click File return for the due period.
Build your return: Select Income and expenses from residential property/bright-line income. ‘Interest incurred from residential property’ will also be automatically selected.
BIC code: Your BIC code, which identifies the main type of work you do, will be automatically displayed. If it's not displayed, find your BIC code. Click Next.
Secondary forms: Select This return will include IR3R Rental Income and click Next.
Specific situation: Select No specific situations apply (unless you're filing a part year return) and click Next. You don't need to include attachments.
Disclosures: Select You have no disclosure to make and click Next.
Income: Copy the Rental income and Rental deductions figures from Solo into the 'Income and expenses from residential property' section of your return.
Copy the Total rental interest and Interest expense claimed figures in the 'Residential property interest limitation' section of your return and click Next.
Tax calculation: You will now see a summary of your total taxable income, any tax that has already been paid (Total tax credits) and how much tax you have left to pay (Residual income tax). If you've paid provisional tax during the year, it will be included in the next step. Click Next.
Review: Lastly you will see any provisional tax that's been paid and your estimated total of remaining tax to pay. Click Next.
That's the important part done. Next you need to copy some figures from Solo into your IR3R Rental Income form.
2. Filing your IR3R rental income form
The IR3R is part of your tax return and used by the IRD to collect statistics. The figures you enter in the IR3R will not affect how much tax you pay.
Copy the figures from Solo info the relevant box in the online form. Click Next.
That's it, you should now be able to review and submit your return. Once you have submitted a return it can be changed later in your myIR.
3. Pay the amount due to the IRD
Use the payment options provided when completing your return to pay the due amount to the IRD. Or visit your online banking and use the 'pay tax' function to make payment.
Note: Solo doesn't handle any tax payments to the IRD. Tax payments need to be made outside of Solo directly from your bank to the IRD.
How Solo calculates income tax
The amount of tax you pay depends on your profit (your income minus your expenses) for the tax year (1 April - 31 March).
In order to calculate your profit and the resulting income tax, Solo first needs to know your total income and expense for the year so far.
To work out your total income, Solo combines any income transactions that have been categorised, with any taxed income from your IRD feed. Solo then minuses any expenses that have been categorised and any depreciation from your assets. The basic equation looks like this:
+ Categorised income transactions
+ Income from the IRD feed (if relevant)
- Categorised expense transactions
- Asset depreciation
= Profit (taxable income)
Your income tax is then calculated based on your profit, in relation to the personal income tax brackets.
Note: Currently Solo does not ring-fence rental expenses. This means that if you make a loss on your rental (your expenses are more than your income), that loss will be subtracted from the profit you make on other income sources.
If you have both rental income and taxed income, such as salary or wages, your rental income is added on top of your taxed income.
For example, if you've earned $10k of rental income and $55 from a salary, the $10k is not taxed at the lowest tax bracket of 10.5%. It is considered income between $53,500 to $78,100 and therefore taxed at 30%.
Note: If you have your IRD feed connected Solo will automatically take into consideration any tax that has already been paid.
More info: How the IRD Feed works
What if I own the property with a partner/spouse?
If you are not the sole owner of the property you can enter your property ownership percentage in Solo's settings and, Solo will automatically split your rental income and expenses according to the percentage.
For example, if you are the sole owner enter '100' %. If you own the property 50/50 with a partner then enter '50' %.
What if I start using Solo part-way through the year?
You can start using Solo at any time during the year. For Solo to accurately calculate your income tax and tax return you just need to categorise all your income and expense transactions since the beginning of the financial year (1 April).
If you have a lot of transactions to process, there are features available to help you batch categorise transactions.
When you connect your IRD feed Solo will automatically retrieve all your taxed income (and the amount of tax you've paid) from the IRD and include it in Solo's calculations. You don't need to categorise any income transactions for income you see in the IRD feed.
I hope this article has answered all your rental tax questions and given you a better understanding of how rental tax in Solo works. As always, if you have any further questions please send a message though the in-app chat and we will be happy to help.