Ring-fencing of rental losses
Any excess expenditure is able to be carried forward or suspended and be offset against future residential property income.
What is a Residential Rental Property?
Is it a dwelling?
This includes AirBnB but excludes hotel, motel, hostel etc
It is residential land?
The land has, will have or may have a dwelling built on it. This includes overseas property held by a New Zealand tax resident.
- your main home
- property covered under the mixed use asset rules
- property used predominantly as business premises
- Property owned by widely held companies
- employee accommodation
- property held on revenue account – this exclusion only applies if notice is given to the Inland Revenue in the tax return for the year of acquisition and the taxpayer can separate out deductions for the land
How do the rules apply?
By default, the rules apply on a portfolio basis. This means the taxpayer calculates their overall profit or loss across all residential rental properties.
However, you can elect to apply the rules on a property by property basis. You must notify the Inland Revenue in the tax return for the year the property becomes a residential rental property (or the 2019-2020 return for an existing property)
You can have both.
How can you use ring-fenced deductions?
You can offset residential rental property excess deductions against:
- future years residential rental property income
- income on the sale of a residential rental property
If the sale of the residential rental property is taxed and you still have excess deductions left after applying to the net income from the sale these losses are then released and able to be applied to other income like salary or wages if:
- you used property by property basis or
- the property was part of a portfolio and all properties have been sold and all of the sales were taxed
If the above does not apply, the excess deductions are ring-fenced and carried forward to be offset against future residential rental properties.
Structuring around the rules
The rules ensure that interest on borrowings to acquire an interest in a residential land rich company, trust, partnership or LTC is non-deductible.
Ring fencing occurs when the deemed share of residential rental property rental income is less than the residential rental property loan interest used to acquire the shares, partnership or trust interests.
What is a residential land rich company?
An entity which owns a residential rental property and over 50% of the entities assets are residential land.
We have outlined the key questions to consider below - please contact Saunders Robinson Brown for specific legal property advice.
- Will you be happy with the default (portfolio) basis or will you elect for property by property basis?
- How much compliance time will each basis take?
- Are any or the residential rental properties subject to tax on sale and a capital gain is expected?
- Are any or the residential rental properties subject to tax on sale and a capital loss is expected?
The above information is of a general nature only. The information contained above does in no way constitute accounting advice and all readers should contact an Accountant for advice regarding your specific circumstances.
About Chris Boivin
Chris is a Partner advising clients on a wide range of matters. He assists with both commercial, rural and residential property matters, as well as business transactions and asset planning.
About Renee Hughes
Renee joined Saunders Robinson Brown in January 2018. Renee is the Management Accountant for Saunders Robinson Brown. She looks after our clients financial and taxation needs.