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Ring Fencing of Rental Losses

IRD recently released draft legislation for ring-fencing of rental property losses.

Currently, if a rental property makes a loss, that loss is offset against other employment income and normally results in a tax refund. From 1 April 2019, IRD have drafted legislation that this will no longer occur. Instead the loss will be ‘ring-fenced’ and only able to be off-set against future rental profits.

Currently, this legislation is only in draft and can be viewed here.

The key points are:

  • Start date of 1 April 2019 (soon)
  • Losses will be carried forward and offset against future rental profits (or could be profits from the sale)
  • Interest will also be ring-fenced when borrowed in a parent entity
  • Applies to “residential land” and does not include:
    • Farms
    • Commercial Properties
    • Holiday homes with mixed use
    • Trading properties

Important thoughts to consider:

Maintenance between now and 31 March 2019. It may be beneficial to complete any preventative repairs and maintenance prior to 31 March 2019. Especially for bigger items such as bathroom or kitchen repairs, painting etc, if they are going to be done anyway. If these repairs need to be completed within the next six months, doing them before 31 March 2019 would result in an increase loss that is available to offset personal income. Compared to after 1 April 2019, where the loss would be ring-fenced.

Portfolio basis or property by property basis. We will provide more information about this over the next few months and when any elections are required. This may also affect you if your rental property is in a Trust that earns other income.

Can you turn a negatively geared property to profit?

  • Consider reviewing the rent – are you receiving market rent?
  • Are there opportunities to add value:
    • Minor dwellings (duel rental income)
    • Renovations or bedroom additions to increase rents
    • Rent by the room agreement
    • Subdivision of property

Structure. Is there a way to structure your debt, property and/or business more tax efficiently? Talk to us about this.

If your rental property makes a profit, there will be no changes for you.

Call Tim Doyle on 07 823 4980 or email: tim@agbizaccountants.co.nz to discuss any questions you may have.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.



 

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