Earlier this year Inland Revenue released information around claiming tax deductions for costs incurred in order to meet Healthy Homes Standards. This information is helpful for all residential landlords and owners of investment properties.
Question We’ve Been Asked
Inland Revenue released the information as Question We’ve Been Asked QB 20/01 Can owners of existing residential rental properties claim income tax deductions for costs incurred to meet Healthy Homes standards?
We’ve been covering the Health Homes Standards (HHS) over the last two years; our most recent post reminds landlords of the 1 December deadline for compliance statements. For some landlords, meeting the new standards by the deadline of 1 July 2021 will require an expenditure to cover purchases and installation of necessary items, or repair work, or both.
Costs of a revenue nature
The Inland Revenue Department’s answer was broken down into costs by nature and how to identify the relevant asset.
Costs of a revenue nature are generally considered tax deductible within the year they are incurred. These might include costs incurred for repairs, minor alterations or additions that don’t change the character of the building, record keeping and providing relevant information in tenancy agreements, and replacing items on a like-for-like basis in the future where they have previously been treated as part of the building.
How depreciation can be applied to capital costs
Depreciation losses can be deducted for capital costs incurred unless they are for something that is part of a residential rental building. The cost of items that are part of the rental building are added to the building’s cost and are depreciated at the same rate as the building — generally at zero percent.
Inland Revenue listed the following items as likely to be considered part of the building:
- Smoke alarms
- Insulation
- Ducted or multi-unit heat pumps
- Flued fires (wood or gas)
- New or replacement openable windows
- New exterior doors
- Most extractor fans or range hoods
- Ground moisture barriers
- Drainage systems for storm, surface, and groundwater and drainage of water from roofs.
Determining whether expenditure is revenue or capital in nature
To determine whether expenditure is capital in nature and depreciable or revenue in nature and deductible in the year incurred, is down to examination of the specific facts.
Costs incurred to meet the Healthy Homes Standards will be capital in nature if the work results in the replacement, reconstruction, or renewal of the whole asset or substantially the whole asset, or goes beyond making good any wear and tear (i.e., is not a repair) on the asset and changes the character of the asset in doing so.
Costs incurred in repairing or maintaining as asset short of changing its character, or without replacing, reconstructing, or renewing the whole asset, or substantially the whole asset, will be revenue in nature.
Identifying the relevant asset
The Commissioner has created a three-step test to be used to assess whether expenditure has been incurred for an item that is a separate asset or part of a larger asset, i.e., a residential rental building.
View this three-step test and the Question We’ve Been Asked QB 20/01 in full.
We recommend speaking with your accountant for further clarification around which HHS work you can and can’t claim deductions for.
Get in touch with Irelands for more information about meeting your Healthy Homes Standards obligations and our property management and real estate services.