Changes to Farm House Deductions

As highlighted in previous newsletters, IRD have been looking at deductions applicable to housing for farmers and orchardists. They have recently released their decision.

Until now there has been no difference between deductions applicable to “real” farmers and those deemed to be “lifestylers”. From the 2018 tax year, there will now be a difference.

If a farmer/orchardist buys a property and the house makes up more than 20% of the value of the property, the farmer will be a “Type 2” farmer. As a Type 2 farmer, you will be not be able to claim a full deduction for rates or interest on mortgages. Those expenses and others related to the property (such as electricity for the house) will need to be apportioned between the business and the private use. Each case will vary and will depend on the facts of a particular situation.

Farmhouse

All other farmers will be deemed to be “Type 1” farmers. This is where the house value is 20% or less of the overall value of the property. In these cases, full deductions are allowed for rates and mortgage interest. When it comes to claiming things like electricity, previously farmers were allowed a “no questions asked” deduction of 25%. This was an historic deduction with no proof needed. From the 2018 year this will now be limited to 20% for Type 1 farmers and orchardists. For Type 2 farmers, the deduction is limited to their actual usage – so a calculation is needed.

In most cases (particularly in relation to farms), it will be obvious whether the property is a Type 1 or Type 2. Orchards, however may be a little different. IRD has provided some guidelines on how the difference between Type 1 and Type 2 properties should be made. If historic purchase prices are not appropriate, you are able to use rateable valuations. In examining rating valuations for orchards however, we have found them not to be particularly helpful when determining the split between the house/section and the rest of the property. In these cases, it may be that some sort of valuation is needed to determine the value of the house compared to the total value of the property. IRD have said this can be done by a real estate agent or of course a formal valuation by a registered valuer is ideal.