In an effort to level the playing field between property speculators/investors and home buyers, speculators and investors are no longer able to offset tax losses from their residential properties against their other income (eg salary or wages, or business income) to reduce their income tax liability. This legislation is known as ring-fencing of rental losses.

The new rules limit a person’s deductions for expenditure incurred in relation to residential land to income derived from the land. Let’s break it down a little more.

Important points

The main points to note are:

• losses made on residential rental properties are not able to be offset against other income going forward
• losses can be retained and used against future rental profits; or used against profit on other rental properties in the same or future periods
• losses can be used to offset any taxes owing on the sale of the land (often there won’t be any as we have no capital gains tax)
• the rules take effect from 1 April (for the 2020 financial year) so in effect they are backdated. (However, the impending implementation of the rules has been communicated for months.)

The fine print

Here’s some more detail:

• The provisions apply to “residential rental property”, meaning “residential land” for which the owner is allowed a deduction relating to the use or disposal of the land.
• “Residential land” is:
  • land that has a dwelling on it
  • land for which the owner has an arrangement to build a dwelling on it, or
  • bare land that may be used for building a dwelling under the relevant district plan.
  • but does not include land that is used predominantly as business premises, or farmland.
• Land that is residential land for part of an income year is also included. This means that if there is a change of use of residential land in an income year (eg from residential rental to commercial rental), it remains residential rental property for that year and any ring-fenced deductions in relation to the property may be used in that year against any other income from the property (for example, commercial rent).
• Overseas rental properties of New Zealand residents will also be subject to the ring-fencing rules.

Need help?

The new rules do have some complexities and that specific advice should be sought for your situation. Please get in touch if you have questions or you’d like to talk through options.