A Great Way to Get onto the Property Ladder and Get Ahead

If I were 22 years old again and wanting to get ahead, one effective option would be to buy a personal house and then have flatmates.

Benefits of having flatmates:

• Flatmate income can be included alongside your regular income to help meet bank servicing criteria.
• The cost of power, internet, cleaning products, and some consumables is shared across more people, reducing your personal expenses.
• Flatmates contribute to mortgage payments, rates, insurance, and repairs, making home ownership significantly more affordable.

A common mistake: Boarders versus Flatmates and the tax consequences

• Boarder income is tax free if below certain thresholds.
• Flatmate income is taxable.

I often hear people say, either in person or on forums, that “I have a boarder so I do not have to pay tax” or “get a boarder as it is tax free”. In most cases these situations are actually flatmate arrangements, which means the income is taxable.

The key requirement for being classified as a boarder for tax purposes is the provision of regular meals. A typical example is hosting an international student to whom you provide breakfast and dinner most days. In a boarder arrangement, you are generally providing more than just a room, including items such as towels, sheets, and other services or products.

In most situations, it is a flatmate arrangement. For example, you rent a room to a friend for $250 per week, and they pay a share of the power and internet while purchasing their own groceries for meals.

Flatmate income is taxable, so why is that sometimes an advantage?

While flatmate income is taxable, a portion of the related expenses can be claimed. If you are starting out and have a high mortgage, the deductible expenses will often exceed the income received, resulting in a loss.

• Ring fencing does not apply in this scenario. If there is a loss, it can offset your personal income from wages and result in a tax refund. In comparison, losses from standard residential rental properties are ring fenced and can only offset future residential rental profits, not salary or business income.
• Interest limitation has not applied to flatmate interest expense in the past. If a future government reinstates interest limitation, it is likely this will not apply to flatmates.

If there is a taxable loss from having flatmates, this loss can be offset against salary or wage income for the year and result in a tax refund or reduced tax to pay.

Recent example

Jack and Jill own a personal house for the full year ending 31 March 2025 and have a loan of $600,000 that was used to purchase the property.

They have a couple as flatmates, and it was calculated that they use 40 percent of the property.

Great tip to reduce tax or increase a tax refund

The number one tip to reduce tax on a rental property is to get a chattels valuation completed by www.valuit.co.nz For flatmates, the deduction for chattels depreciation is even greater, as you can depreciate shared furniture such as a washing machine, dryer, television, couches, and fridge. While only the flatmate portion of the depreciation can be claimed, this is normally a substantial additional expense that reduces profit or increases the loss.

Risk

Be realistic when calculating the portion of the property attributed to flatmates. Generally, the owners occupy larger exclusive areas such as the main bedroom with ensuite. It is important that the proportion claimed reflects the actual use of the property.

Article by Ross Barnett

This article is for general information only and is not intended as accounting, tax, or financial advice. You should seek advice from a qualified professional before acting on any information provided.

Any examples or figures are for illustration purposes only and should not be relied on for decision-making.