Ringfencing of Residential Property

Previously, property owners were able to offset their residential property deductions against all other income such as salaries and wages. The government considered this to be unfair to home buyers. The previous rules gave property investors an advantage where they were able to offset some of their expenses against other income sources. This allowed them to outbid home buyers creating and uneven playing field when purchasing property. The new ring fencing rules have been introduced to create a more fair tax system and improve the affordability of housing for home buyers.

What are the new rules?

With the new subpart EL of the ITA 2007, residential property deductions are ring fenced. This means that expenses incurred in the maintenance residential property can be claimed as deductions only up to the amount of rental income earned. The remaining deductions cannot be offset against other income such as salary and wages to reduce income tax liability.

These rules apply to residential land which is land that has a dwelling on it or there is a plan to build a dwelling. Business premises and farmland is excluded.

The ringfencing rules are not applied to:

• The taxpayers main home
• Government Enterprises
• Employee Accommodation
• Property owned by companies that aren’t close companies
• Property that will be taxed on sale
• Property Subject to Mixed Asset Rule (The rule applies to assets with both private and income earning use)

How are the rules applied?

The default way in which the ringfencing rules will apply are on a portfolio basis. This is where the investor calculates their overall profit/loss and deductions across all their properties. The total deductions then offset the total income. However, an investor can elect to apply the ringfencing rules using the property-by-property approach. So, income from each property will be offset by deductions that relate to that property only.

When deductions exceed the residential rental income in a year, these deductions must be carried forward to the next year when residential rental income is derived. They cannot be offset against other income earned by the investor. This will contribute to a more fair residential property market in NZ.

For advice specific to your properties and situation, get in touch with us below.

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