Deductibility of legal expenses for rental property investors

Previously, rental property investors could not deduct legal expenses under section DB 62 unless they were in the business of providing residential rental accommodation. Recent changes have been made to allow property investors who are buying a residential property to access these deductions.

Under section DB 62 of the Income Tax Act 2007, an individual can deduct legal expenses if they are $10,000 or less in an income year, including legal expenses that relate to spending on capital assets such as property. The legal expenses still need to meet the general permission of being incurred in deriving income or as part of a business activity, and cannot be claimed if they relate to expenditure of a private or domestic nature, i.e., the purchase of the family home.

The Inland Revenue Department’s (IRD) position regarding selling a rental property has not changed – rental property investors who are not in the business of providing residential rental accommodation are not eligible to claim legal expenses for selling a rental property. However, those in the business of providing residential rental accommodation can continue to claim legal fees incurred in selling a rental property.

The IRD is allowing those who relied on their previous advice to request an amendment under section 113 of the Tax Administration Act 1994. These requests will be considered on a case-by-case basis.

Posted on 11 May '18 by , under tax.