What to Ask an Accountant Before Buying a Rental Property

There comes a time in every middle-aged person’s life when they ask themselves:

“Should I buy a rental investment?”

I’ve talked to enough fellow millennials to know that this is often seen as the ‘next step’ after acquiring one’s first home. If you find yourself in this same situation, this article is for you! We won’t talk about whether buying residential rental property is a good investment or not. We’ll leave that to the investment gurus and property bloggers to work out.

We’ll talk about something more mundane, but probably more important: What you should be asking an accountant before buying rental property.

What tax structure should I be using?

The first, most important question is this.

Generally speaking, there are three ways to start investing in property:

1. Do it in your own name (i.e. as a sole trader)
2. Open up an investing company (start a limited liability company to invest on your behalf)
3. Open up an investing trust (start a family trust to invest on your behalf)

Let’s consider the pros and cons of each method.

Doing it in your own name

Pros:

• This is the easiest option. You buy the property, put it in your name, and you’re done. If you’ve jointly purchased the property with another person (usually your spouse), the property will be in both your names.
• At the end of the financial year, you report the earnings in your personal name. If you’re jointly owning the property, then you’ll split the income and expenses on the rental property based on each individual’s ownership proportion (usually 50/50).
• This is arguably the easiest way to start investing in property.

Cons:

• Well — from a New Zealand tax perspective — you can’t offset your personal income with losses from your residential rental. Your losses are effectively ‘ring-fenced’ to only be offset against future profits from your rental portfolio. You’ll find that this is usually the case even when it comes to other tax structures. Losses from residential rentals can only be offset against other residential rental income.
• But the real clincher is that if you do make a profit on your residential rental, all of it gets declared in your personal name. So if, for example, you’re working in New Zealand and you make an annual income of $180,000 a year, any rental income you make will be taxed at the top tax bracket of 39% since it is added on top of your regular annual income.
• You could, theoretically, have the non-working spouse own the rental property 100% in their name to take advantage of their lower personal tax brackets. But this will undoubtedly create legal issues further down the line if you (God forbid) happen to split with your spouse.

Setting up an investment company

Pros:

• Setting up an investment company is as easy as setting up a company on the company register. Okay, so maybe not as easy as doing it in your personal name, but still, it’s not that hard.
• The main benefit of doing it through an investment company is that any profit made by the rental property has a 28% tax rate. So if you’re a high-income individual and you don’t want your rental income to be taxed at a high rate, setting up a company for your investment assets is the way to go. This allows the company to retain the value of your investment rather than have the investment income declared in your name. Further down the line, you can draw down on your investments when you are ready for retirement (by which stage you will be a less-than-high-income individual and thus be in a lower tax bracket).
• Also, something something limited liability, etc, etc. Look, in this particular situation, there is a good chance the banks can still go after your personal assets in the event of a default. In fact, most banks will require a security over your personal assets if they’re going to lend to your company.

Cons:

• As mentioned above, banks aren’t too happy to lend to investment companies. Be sure to check with your banker on what their thoughts are about it. In 99% of all cases, they will require security, which will often mean a lien over your personal home or other personal assets. So, despite setting up a company, you don’t get to truly benefit from the limited liability protection of a company.
• Maintaining a company can also be tedious. There are annual returns to file, shareholder current accounts to manage and an imputation credit account to worry about. If you’re setting up a company, you’ll probably want an accountant to manage it for you (which is an additional cost).

Setting up an investment trust

Pros:

• Possibly the most legally airtight way to secure your investment assets. Trusts can be set up with very clear beneficiaries. So if you have property from a prior relationship, or property acquired prior to your current relationship, put it in a trust if you don’t want your current partner to claim it as relationship property if you split up.
• Trusts are also a handy way for parents to pass down rental properties they own to their children. This way, the children’s spouses don’t have a claim over the properties held in the trust. In short, trusts are a great way to secure intergenerational wealth and ‘keep it all in the family’.

Cons:

• Trusts are costly to set up. We’re talking thousands of dollars here. By comparison, a company only costs roughly $120 to set up (and an annual payment of about $60 to maintain it). Most lawyers and some accountants will set up trusts for you, but be prepared to pay big money for this!
• Furthermore, with recent tax changes in New Zealand, trusts are taxed at a flat rate of 39%. That’s right, it’s a whole 11 points higher than the corporate tax rate of 28%. You can have the beneficiaries pay taxes on the trust (with the tax calculation done in their personal names). However, this can result in poor tax efficiencies if the beneficiaries are high-income individuals.
• In general, I don’t recommend setting up trusts for investment/trading purposes. The days of setting up trusts as a tax vehicle in New Zealand have long gone, and they are not coming back. If you want to set up a trust, you should be very clear in your intention to use it mainly to protect your family assets. You’re not getting any tax efficiencies out of it.

Should I set up a separate bank account for my rental investments?

Yes. You should.

At the very least, you should have just one account that keeps track of:

1. The rental income you receive from the property
2. The expenses that you spend on the property (insurance, maintenance, rates, etc)

Setting up tax savings accounts is optional — but recommended if you want to put tax away for your rental income.

Please don’t run everything through your personal daily spending account. It will be a pain for you to sort everything out at year’s end to do your year-end taxes.

What records should I be keeping track of?

Your rental account bank transactions are the most important ones. Which is why you want to set up a separate rental bank account.

Next would be the rental statements you receive from your property manager (if you are using one). They will usually send you a year-end summary of your rental income, their management fee and any expenses they’ve spent on your behalf.

You should also be keeping a copy of all payments made on the property, such as:

1. Insurance invoices
2. Rates notices
3. Repair and maintenance invoices
4. Fixed asset purchases (heat pumps, white ware, furniture, etc)

These will help you put together your financial year-end statements for your rental income. If you have an accountant, they will ask for these anyway.

Working out tax-deductible expenses

For the most part, rental property expenses are pretty easy to work out.

All of the following are 100% tax deductible (as of September 2025 in New Zealand):

1. Home/content insurance on the property
2. Rates payments
3. Management fees paid to the property managers
4. Accounting fees
5. Cleaning products/tools used to maintain the property
6. Minor assets (small furnishings to fill the property)

Things get a little more complicated when it comes to repairs and fixed assets.

Calculating fixed asset costs for your rental property

According to New Zealand tax law, all fixed assets worth more than $1,000 are to be depreciated instead of being treated as expenses. If the fixed asset is worth less than $1,000, then it can be treated as a minor asset (which is a tax-deductible expense).

For example:

Reddy buys a heat pump worth $2,000 for his rental property. Because this asset is worth more than $1,000, he cannot expense it as a minor asset. Instead, he has to depreciate this asset on an annual basis. The depreciation rate (taken from the IRD website) is 20% for heat pumps. In the first year, he can claim $400 (20% 0f $2,000) as depreciation expense. He will expense another 20% of the remaining $1,600 in the next year and so on.

So, to summarise, you cannot claim the full amount of fixed assets worth more than $1,000 as a full tax deduction. Instead, you have to depreciate it over a number of years.

Calculating repair and maintenance costs

In New Zealand tax law, not all ‘repair’ work is considered to be a tax deductible expense. Generally speaking, all maintenance/repair work on a property can be categorised as:

1. Repair and maintenance
2. Improvement to the property

Repair and Maintenance

Repair and maintenance work is usually tax-deductible in the year it is incurred. Repair work tends to be smaller in value, is focused on maintaining current use and is usually done as part of the items wear and year.

For example:

Musa has a rental property. Ongoing water damage has caused the kitchen cupboards to start peeling. He gets a cabinet joiner to replace some of the cabinet doors. This costs $2,000. This is considered a repair expense and is fully tax-deductible. Even though the replacement doors can be seen as a fixed asset, they are merely components of a larger asset, which is the kitchen cabinetry.

Improvement to the property

An improvement to the property is any work that enhances the property. This often includes the replacement of an existing asset as part of the repair work.

For example:

Goodhomes Limited has a rental property. They decide to replace the bathtub in the bathroom with a shower, to save water and create more space in the bathroom. This costs a total of $10,000. In this case, it is important to capitalise the value of the shower unit and other ancillary items worth more than $1,000. These fixed assets will then be depreciated over their useful life. Goodhomes Limited cannot claim the $10,000 as a full tax expense in the year it was spent.

These are just some general guidelines on dealing with repair-related expenses. If you are planning on doing major renovations to your rental property, it is worth thinking about how you can break down those repairs. Combining several pieces of smaller repair work into one invoice can result in it being treated as an ‘improvement’. Consider carrying out repairs over a period of time instead of in one lump sum. This allows you to maximise your yearly tax claim on repairs.

Also, remember that not all fixed asset improvements can be depreciated. Generally speaking, any structural work done on the building (walls, decks, roofing, etc) is not depreciable. This means that improvements of this nature simply add to the value of the property and are not tax-deductible.

What tax issues do I need to think about when selling rental property?

As of September 2026 in New Zealand, if you sell your property within two years of acquiring it, you will be required to pay tax on the gain generated from your sale. If you sell it after 2 years of acquiring it, then you pay no tax on the capital gain.

In most cases, I would simply advise clients (who are not in the business of developing property/house trading) not to sell their rental properties until after the two-year mark. Note that if you run a business developing property or trading in houses, this exemption does not apply to you. Such entities may still be liable for gains tax on property that they trade in. But if you’re reading this article, I’m going to assume that you’re not in the business of buying/selling houses and that you’re just a regular investor.

If you do end up being liable for capital gains tax, here is how you calculate the gain:

Sale price of property - (Cost price of Property + Improvements to property (including structural work) + Costs associated with selling property (Legal fees, accounting fees, etc)) = Gain/(Loss) on sale

How is the gain/loss taxed?

You are taxed on the Gain generated from the sale. If you generate a Loss, this loss is simply transferred to other properties within your rental portfolio. Don’t have a rental portfolio anymore? Then the loss stays with you every year until you restart your property portfolio. Remember that losses from residential rental cannot be offset against anything else but income from residential rental!

The Gain on the sale will be taxed according to how you’ve structured your investment entity. If you are a sole trader, the Gain will add to your personal income, and it may bump you up to a higher tax bracket for that year. If you’re a high-income earner making $160,000 a year, adding capital gain to your personal name can bump you up to the 39% tax bracket. A company will always pay the same, flat 28% tax. Trusts pay 39% tax on the gain.

Should I be investing in residential rental properties?

Sorry, but you’re asking the wrong professional here.

As accountants, we can’t give qualified investment advice. That is something only qualified financial advisers can do. Personally, I don’t invest in residential rentals. I find that residential rentals have become a bit of a policy football here in New Zealand. The tax policies for residential rentals change every time a new party gets elected to power. In fact, all the advice written here today will possibly be obsolete 12 months from now.

If you’re looking to build an investment portfolio, always remember to diversify your investments. Make sure that you’re not putting all your money into residential rentals. Consider investing in other investments, like shares, peer-to-peer lending, bonds, etc.

At the end of the day, property taxes can be daunting, but if you work with the right accountant, it isn’t that hard!

Sam is the director of SH Advisory, an online accounting firm for small businesses and startups in NZ. He is also the creator of The Comic Accountant, an internationally-read finance comic blog. With 15 years experience in accounting and finance, he loves sharing quality financial advice with small business owners everywhere. In his spare time, he likes to nerd out over the latest board game launches and great PC gaming deals online. If you need help with your small business and startup, Sam is the person you want to talk to!