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WE'RE BLOGGING TODAY

RING-FENCING RENTAL PROPERTY LOSSES: PART 1

4/5/2018

 
Shock! Horror! IRD released a proposal to ring-fence rental property losses. What does that mean for you?

Current situation

Picture
At present if you own a rental property (sole trader, partnership, LTC) and it makes a loss, then you can offset that loss against your personal income or the income of the shareholder/s (in the case of an LTC). This means you pay less tax or get a tax refund. In IRD speak, that is

"Currently investors (particularly highly-geared investors) have part of the cost of servicing their mortgages subsidised by the reduced tax on their other income sources."
​

Thousands and thousands of Mums and Dads across New Zealand have become landlords in this way, and the tax refunds help pay for the mortgage.

Possible Impact

From 2019-20 tax year onwards, losses won't be passed on to the owners, so no more personal tax refunds. Instead, ring-fenced residential rental* or other losses from one year could be offset against:
  • residential rental income from future years (from any property); and
  • taxable income on the sale of any residential land.

Solutions for Investors

IRD make this comment:
It is suggested that the loss ring-fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.

So, our initial thoughts are that investors with negatively-geared property need to look at
  • paying down debt to make the property cashflow neutral
  • buying cash-flow positive property to get income into the portfolio to offset the losses
  • re-budgeting to account for the fact that there may not be any tax refunds
  • consider restructuring - although you need to be careful that this is not done purely for tax purposes, as this could be considered tax avoidance by IRD.

Don't Panic

  • This is not law yet
  • You have time to implement solutions
  • As more information comes to hand and the proposals are firmed up, we will make further recommendations

Where to Read the IRD Proposal

Goto this page

FURTHER READING

Check out Part 2 here

* If your house is a Mixed Use Asset, ie you use it as a holiday home that you rent out to others, then the rules wouldn't apply to you. They also don't apply to your "main home" ie where you live, or if you are buying and selling houses for profit e.g. a trader.
Helen Pender
4/7/2018 01:45:57 pm

I believe this will have a negative impact on new home investments and will also push up the prices of old homes at the bottom end of the market. Surely this goes against the increase in housing stock that the government is looking for.

Shane
4/16/2018 06:18:52 pm

Helen, All this government is looking for is more of our hard earned dollars. In any and every way it can.

Garreth Collard
4/7/2018 03:42:07 pm

Should read “From 2019-20 onward...”

Garreth Collard
4/25/2018 11:50:16 pm

Updates coming on strategy i.e the ring-fencing is proposed to apply to “residential property land-rich” entities. IRD says this is "where over 50% of the entity’s assets are residential properties within the scope of the ring-fencing rules, and/or shares or interests in other residential property land-rich entities." So, if your entity has other assets e.g. managed funds, shares in a business, holiday home etc, and the value of those assets is more than the value of the negatively-geared rental, then the losses won't be ring-fenced... Just remember this is all still at proposal stage.

Aaron Holmes
5/21/2018 09:41:34 am

Hi Garreth, any updates on this proposal becoming law? This concerns me a little as it is tough to find positively geared properties in this market that have real capital gain potential. Thanks, Aaron

Garreth Collard link
5/21/2018 11:26:51 am

No news as yet, but we have some updated strategy advice which we will email to our clients soon

Ron
5/21/2018 01:34:55 pm

Not sure how this will increase the housing supply

Aaron Holmes
5/24/2018 11:28:47 am

Hi Garreth, if the proposal is that any losses are no longer tax deductible, would the opposite apply in terms of any LTC profits or gains not being taxable? With many people the plan is to live off the rental income to supplement the pension so if this was not subject to tax would be a good thing? Aaron

Garreth Collard
5/30/2018 06:42:08 pm

Hi Aaron, that would be nice, but no such proposal has been floated by IRD.

Garreth Collard
6/5/2018 10:06:22 am

We recommend that any repairs due be brought forward into the current tax year... While you can still fully claim the loss.


Comments are closed.

    Garreth Collard

    Accounting for your rental residential investment property; specialised property tax advice.  Buy me a coffee! 

    View my profile on LinkedIn

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  • HOME
  • ABOUT
    • IN THE NEWS >
      • OWNERSHIP STRUCTURES
      • TURNING SKILLS INTO MONEY AND A BETTER LIFESTYLE
    • PARTNERS
    • SERVICES
    • TESTIMONIALS
    • WHY USE A PROPERTY ACCOUNTANT
  • FAQ
    • AML/CFT
    • ANTI-CORRUPTION
    • AUDIT SHIELD
    • DATA PRIVACY
    • FORMS
    • GETTING STARTED IN INVESTMENT PROPERTY
    • HOW TO CALCULATE RENTAL YIELD
    • INFO FOR NEW INVESTORS
    • INVOICES
    • NEW VS OLD VS LAND&BUILD
    • TAX RETURN FAQ
    • TAX POOLING
  • CONTACT
  • BLOG