OFFSET LTC PROFITS OR LOSSES AGAINST OTHER RENTALS

Can you offset LTC profits or losses against other rentals? It’s one of the most common questions we get from investors who hold some rental property through a Look-Through Company (LTC) and some in their own name. Inland Revenue answered this back in September 2019 with Tax Information Bulletin tib-vol31-no8, and the short answer is: usually, yes — but it depends entirely on an election you make, and most investors don’t realise they’re making it.

For this article, we’re assuming you (or your LTC) hold only residential rental property — no commercial property, and you’re not a trader, developer, or associated person.

Key Points — 30 Second Read

• Since 2019, residential rental losses have been “ring-fenced” — you can offset them against other residential rental income, but not against wages, salary, or other non-rental income.
• An LTC’s profits or losses flow straight through to its shareholders’ personal tax returns.
• Whether you can offset an LTC loss against a personally-owned rental’s profit (or vice versa) depends on whether the LTC applies ring-fencing on a portfolio basis or a property-by-property basis.
• Choose the portfolio basis, and you generally can offset LTC losses against profitable rentals you hold personally or in a standard partnership.
• You can’t offset a personally-owned rental loss against a distribution from a trust — a trust distribution changes character and becomes beneficiary income, not rental income.
• Partnerships give you more flexibility than LTCs here: partners don’t have to mirror the partnership’s own ring-fencing election in their personal returns.
• Restructuring your family home into an LTC to free up rental interest deductions is, once again, a live option since interest deductibility was fully restored in 2025 — but talk to us before you commit to it; more info below

How Ring-Fencing Actually Works

Since the 2019-20 income year, residential rental losses in New Zealand no longer offset your other income. If your rental portfolio runs at a loss, you can’t use that loss to reduce the tax on your wages or salary the way investors could in the past. Instead, Inland Revenue “ring-fences” the loss to residential rental activity — you can only use it against residential rental income, either in the same year or by carrying it forward to a future year.

That single rule sits underneath everything else in this article. The real question isn’t whether ring-fencing applies — it does — it’s how widely it applies across the properties you own.

Can You Offset an LTC Loss Against a Personally-Owned Rental’s Profit?

Say your LTC owns a rental property and runs a loss for the year. You and your spouse are the shareholders, so the LTC’s loss flows straight through to your individual IR3 returns, in proportion to your shareholding. Separately, you and your spouse jointly own another rental in your own names — a standard partnership — and that one turns a profit.

Can the LTC’s loss offset the partnership’s profit on your personal tax returns? The answer comes down to two things:

1. Whether the LTC has elected to apply ring-fencing on a portfolio basis or a property-by-property basis.
2. Whether you personally hold any other residential rental income or losses to offset against it.

If the LTC applies the portfolio basis, and you hold at least one other residential rental in your own name or in a standard partnership, the answer is yes. The LTC’s loss can flow through and offset your profitable, personally-owned rental — and the arrangement works in reverse too, offsetting an LTC profit against a personal rental loss.

The Portfolio vs Property-by-Property Election

This election matters more than most investors realise, because it isn’t a one-off form you sign — it’s baked into how the LTC treats every property it owns, and it flows through to how you must treat your own returns too.

• Portfolio basis: the LTC pools the profits and losses across all the properties it owns, then passes the net result through to shareholders. If you take this approach, you must also apply the portfolio basis consistently across your own rental returns.
• Property-by-property basis: the LTC ring-fences each property’s result individually. A loss on one property stays tied to that property and can’t offset income from another — even another property the same LTC owns.

Here’s the flexibility gap worth knowing about: partnerships don’t work the same way. If a partnership files its return on one basis, the individual partners don’t have to apply that same basis in their own personal returns. LTCs don’t offer that flexibility — whichever basis the LTC elects, its shareholders are locked into matching it.

Case Study: Portfolio Basis in Practice

Consider a couple who own a rental through their LTC, plus a second rental jointly in their own names as a standard partnership. The LTC’s property has a large mortgage and runs a loss of $8,000 for the year. Their personally-owned property is mortgage-free and turns a profit of $12,000.

Because their LTC elected the portfolio basis, and they hold that second rental personally, the $8,000 LTC loss flows through to them as shareholders (split according to their shareholding) and offsets their share of the $12,000 profit from their personal rental. Between them, they end up paying tax on $4,000 of net rental income for the year — not the full $12,000 — with no loss left stranded unused.

Had the LTC instead elected the property-by-property basis, that $8,000 loss would have stayed ring-fenced to the loss-making property alone. It couldn’t touch the $12,000 profit sitting in their personally-owned rental. The couple would have paid tax on the full $12,000, while the $8,000 loss simply carried forward, doing nothing for them until that specific property eventually turned a profit of its own.

Same properties, same numbers, a very different tax outcome — purely because of one election most investors don’t think to ask about when they set up their LTC.

What You Still Can’t Offset

Two things ring-fencing never lets you do, regardless of which basis you choose:

• You can’t offset any rental loss — LTC or personal — against income from wages, salary, or other non-rental sources. That’s the whole point of ring-fencing; it keeps rental losses contained to rental income.
• You can’t offset a personal rental loss against a distribution you receive from a trust that owns rental property. Once a trust distributes income to a beneficiary, it changes character and becomes beneficiary income — not rental income — so it sits outside the ring-fencing rules entirely.

Does Restructuring Your Family Home Into an LTC Still Make Sense?

In the past, we regularly helped clients sell their family home into an LTC, freeing up a larger mortgage — with fully deductible interest — against the rental property, while shrinking the (non-deductible) mortgage on their home. Interest deductibility rules took that option off the table for a while. It’s back on the table now that interest deductibility has been fully restored across residential property since 2025 — read our full breakdown in this post for how it works.

This isn’t a decision to make from a blog post alone. There is a bit of complication with IRD requirements for interest deductibility vs how banks offer to restructure. It can cause you to fall afoul of the rules and lose the interest deductions if you don’t get it right. Get in touch with us before you commit to a restructure like this — we’ll model your specific numbers first.

Final Thoughts

Offsetting LTC profits or losses against your other rentals is very possible — but it hinges on an election that’s easy to overlook when an LTC is first set up, and expensive to get wrong once losses start piling up unused. If you hold property through an LTC alongside personally-owned rentals, it’s worth checking which basis your LTC applies, and whether it’s still the right one for your situation.

Not sure which basis your LTC is using, or whether your structure is still working as hard as it could for you? Get in touch with the team at Epsomtax.com — a quick review now could free up losses that are currently sitting stranded, doing nothing for your tax position.