RING-FENCING RENTAL PROPERTY LOSSES: PART 1

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

Current situation

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."
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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.

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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

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* 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.