Winter of financial content

Diana Clement advises how to make a holiday home work for you financially

As winter tightens its icy grip the idea of buying a bolthole in the snow grows in appeal. But a little chalet at the mountain doesn't come cheaply these days. Few investors in ski chalets or other property turn a profit. At best, most mitigate the costs of owning their winter pad.

Returns come in two forms - capital gains and rents.

In recent years many investors have done spectacularly well on paper from the increase in value of their winter retreats. However, experienced property investors know not to speculate on capital gain over the short term, says Auckland Property Investors Association president, Andrew King, especially in the current stage of the property cycle.

Financing the property is relatively easy, says Sue Tierney, mortgage broker at Mortgages By Design in Ponsonby. "If you're buying it for yourself, providing you can afford it from your own personal income, banks are willing to lend."

But unless you're particularly clued up about investment property and taxation, you might want to find yourself an accountant specialising in property. There are plenty of ruses that can save you an awful lot in tax, possibly offsetting some of the losses against your entire tax bill. Generally all costs such as mortgage interest, insurance, rates, maintenance, gardener, security firm, agent's fees and body corporate fees are tax deductible, but only in proportion to the period the property was available for rent.

The trick is that the property doesn't need to be rented for expenses to be tax deductible. You just need to show the Inland Revenue you have made attempts to find tenants. So if you stay in it for one week of the year you can claim that it is available for rent for 51 weeks of the year.

You'll need to keep detailed records of expenses and apportion them to private or rental use. If, for example, you're visiting the property to arrange a tradesman to do work, you can claim petrol expenses.

Institute of Chartered Accountants tax manager Duncan Fraser says the facts need to fit the claim and  there are grey areas such as where the line is drawn between maintenance and improvement.

If the property's available for rent, you can also claim depreciation on the structure as well as fixtures, fittings and furnishings. However, Inland Revenue can claw back depreciation when you sell the home, or in fact if you retire to it, says Fraser. What's more, in May's Budget, finance minister Michael Cullen changed the depreciation rules, draining what was in the past a juicy ruse for property investors.

One popular, but risky investment strategy for holiday homes is to buy a serviced apartment and lease it back to a management company for a guaranteed rent. Typically you'll have a fixed period per year when you can use the apartment and professional management on the ground can be a bonus. On the surface it sounds ideal, but there can be a nasty sting in the tail if you don't like the management company and want to pull out of the agreement because Inland Revenue will then charge you GST on the property.

Ski resort properties can rent for hundreds of dollars a night and as a result the daily or weekly rental market appeals to many buyers. It also allows you to block-book the property for your own use. The key disadvantages of renting short term are that you'll almost certainly need someone on the spot to manage the letting and cleaning, and that the holiday season is short.

Anyone considering buying a second property in a ski resort ought to do their due diligence well as there can be unexpected fish-hooks. When it comes to claims about rents, property price growth and council charges, much of this can be checked on websites such as QV.co.nz and Bookabach.co.nz.

Make sure you acquaint yourself with the local council's rules because they vary across the country. The Queenstown Lakes District Council, for example, charges commercial rates for properties rented out on a short-term basis. Holiday homes let on a long-term basis are charged residential rates.

The reasoning is that short-term rentals are competing in the commercial sector, they generate traffic, noise, groups, in much the same way that hotels/motels do. They are also benefiting from tourism promotion activity, and should contribute to the costs of those activities.

These properties put more pressure on infrastructure than do "ordinary" residential properties, says Meaghan Miller, the council's communications manager.