RING-FENCING RENTAL PROPERTY LOSSES: PART 2

WILL IT HAPPEN?

Hard to say. Now the cat is out of the bag, it might be hard to put it back in.  It is, however, worth noting that attempts have been made to control the property market by brute force before, and they ultimately resulted in a change of government. In the early 1980's, the then Prime Minister, Mr Robert Muldoon, introduced a rent and interest rate freeze in an attempt to control property market growth. The result was that no one could get finance, and so no one could sell either.  Eventually, this regime was repealed.

There has been some very strong push-back by influential companies and bodies, which is to be expected. So, we wait and see.  

STRATEGIES

Meanwhile, let's talk about possible strategies:

1. Bring forward any repairs or maintenance. It is our view that you should attempt to do these during the current financial year. You can then be sure that you can actually claim any losses against your income (if using a LTC, sole trader or partnership to own your rentals).
2. Think about restructuring mortgages as they come up for renewal. Suddenly, paying some principal on that rental mortgage isn't such a bad idea.
3. Start thinking about other types of investments that you can bring into your portfolio, e.g. a mixed-use asset, a commercial building or a share in one, an Airbnb-style house etc

Until where know where things are going to land, these are only ideas to consider at this stage - although point 1 is probably a bit of a no-brainer.

RESIDENTIAL LAND RICH

IRD have proposed that any entity which is not "residential land rich" won't be subject to the ring-fencing rules. 

Please explain?! So, an entity is which is not "residential land rich" is any entity wherein 50% of more of its assets are not rental residential property. For example, a LTC which owns a residential rental, and also owns a mixed use asset, and the value of the rental is less than the value of the mixed-use asset.  

So what? So... this means that the ring-fencing rules wouldn't apply to that entity. Therefore, any losses would still flow through to the shareholders' personal tax returns.

MIXED-USE ASSET

You have a mixed-use asset if, during the tax year, it's used for both private use and income-earning use, and it's also unused for 62 days or more.

The rules apply to any:

• property, regardless of cost price or current value, and
• boat or aircraft which had a cost or market value of $50,000 or more when you bought it, and
• additional item or accessory relating to the asset, eg a quad bike stored at a holiday home.

See here for more info.

So in other words, a mixed-use asset means you have to use it a bit yourself, e.g. a holiday home that you mostly rent out, but that you stay in a bit during the year.

There are various rules (outlined in the above link) which limit what you can claim from these kind of assets, and you have to be careful if you think your gross annual income will be more than 60k (GST registration; that's another issue - especially when it comes to sale time), but it bears thinking about.

SET IN STONE?

By no means. We are recommending a wait-and-see approach at this stage. But start thinking ...

FURTHER READING

You might find our earlier article on this subject useful as well.