From the 2019/20 year (year ended 31 March 2020), most losses made on residential rental properties will no longer be offset against an investors’ other income (e.g. salary, wages, business income). This is known as “ring fencing”.

There are limited circumstances were the losses will be able to be offset against other income.

What land will the rules apply to?
The new rules only apply to “residential land”. They do not apply to farmland or land used predominantly as business premises.

The following types of property are excluded from the rules:

· a person’s main home,

· property subject to the mixed-use asset tax rules (e.g. a bach used privately that is also rented out),

· land that is taxable as part of a land-related business (e.g. land developing, building).

· Certain employee accommodation

The rules apply to residential land, whether it is currently rented out. Bare land and land outside New Zealand is also included.

What happens to the ring-fenced losses?

The ring-fenced losses will be able to be offset against residential rental income from future years, and any taxable income on the sale of residential land to the extent of the income. Losses in excess of the income will generally continue to be ring-fenced.

In situations where properties are taxed on sale, remaining unused losses may be “released” such that they can be offset against the investor’s other income.

However, the ability to do so may depend on which of the two methods an investor uses to account for the property.

The methods: Portfolio and Property-by-Property

Under the new rules there are two methods of accounting for income and expenditure for tax purposes on residential rental property.

Portfolio method - An investor calculates the income and deductions over all the properties in the portfolio. Investors can offset losses from one property against income from other properties across their portfolio. The tax position is based on the overall portfolio result.

Property-by-property method –
An investor calculates the income and deductions for a single property. The tax position is calculated separately for that property.

A taxpayer may use a combination of the methods if they have multiple properties. Once a method is selected it can’t be changed for a particular property.

Which method should I choose?

The Portfolio method will be easier to administer and more likely produce a better tax result if a person has multiple properties with a mix of rental profits and losses.

The Property-by-Property method will be beneficial if it’s anticipated a particular property will have losses after a taxable sale of the property. In such a case, this method will allow the surplus losses remaining to be released and offset against the investor’s other income.

The default position is that the rules apply on a Portfolio basis. However, an investor can elect to use the Property-by-Property method by taking a position using that method in their tax return.

Please contact your Ingham Mora team if you would like to know more.

Grant Neagle