Ring Fencing Rental Losses
Ring Fencing of Residential Rental Property Losses has now been passed into legislation, effective 1 April 2019.
Previously residential property investors offset their rental property losses against their other sources of income i.e. wages, salaries, business income etc, which resulted in tax refunds.
For most people with residential property investments the legislative change will have an impact with losses from properties no longer being able to be offset against other income. The ring fencing of losses applies on a portfolio basis (across all properties), any losses from the portfolio would only be able to be utilised against profits from properties.
Any excess losses will now carry forward to future years, where they will be allocated against rental property profits only.
Commercial properties, employee accommodation (where the owner of the property is also the employer), mixed use assets and a person’s main home are excluded from the ring-fencing legislation.
In summary, if you’re looking to buy a rental property, it is important that you contact us before you take any steps towards making an offer, so we can advise you of the best way to structure this.
The aim of the law change is to level the playing field between property speculators/investors and owner-occupiers. By stopping subsidising investors’ mortgage servicing costs, the Government hopes their abilities to outbid owner-occupiers for properties will be reduced.
The IRD acknowledges the context in which the law change was proposed:
“Speculative capital gain is a likely driver for investor activity in the residential housing market,” it says.
“The average return on rental property excluding capital gains is low – the average gross rental yield on a three-bedroom Auckland property is 3% per annum. This suggests investors are buying property in anticipation of capital gain.”
If you would like to discuss how this affects your situation, please contact us.