Not only have residential investors recently been hit with the extended 5-year bright-line test and insulation standards, new ring-fencing rules will mean residential rental property owners can no longer offset losses from their rental property against their wages/salary income.
This law is expected to raise the IRD an extra $190 million annually from the property sector however there is no real indication on the effect these rules will have on the housing market.
In the past, landlords may have used this annual refund to allow them to hold properties longer, while making capital gains. The IRD say their intention is to level the playing field for owner-occupied buyers.
Although these are genuine losses, we think the IRD saw this as a ‘tax saving’ without having to pay capital gains tax on the sale of a property.
The ring fencing of residential rental losses will be in place, in full, from the beginning of the 2020 Financial Year. This means 2019 will be final year for claiming tax refunds for rental losses.
Going forward, the losses can only be offset against other rental profits in the person’s portfolio, or against gains from the sale of property.
Losses which do not have other portfolio income to be offset against, will be rolled forward to be used in future years.
LTC Company’s and partnerships will also not avoid the new rules.
The ring-fencing rules will not apply to a person’s main home, nor to mixed-use properties, such as the family bach. The rules will however apply to overseas residential rental properties.
These rules are set to impact tax outcomes significantly and ongoing tax compliance will be more complex. Many people believe that no refund = no tax return, but there’s still an obligation to file the return. If you do not ‘roll’ the losses forward each year, they will not be available to be offset against future rental profits.
The Kiwitax team are here to help, and can offer advice specific to your situation.
Please don’t hesitate to get in touch if we can help.