Date: 27th December 2019
‘Ringfencing residential rental losses’ – it’s quite the mouthful! And what exactly, does it mean?! It refers to a change in tax legislation that is likely to affect a number of people in the Wanaka area, due to our high rates of rental investment properties. The legislation was changed at the beginning of this financial year, so we anticipate people will really start to notice the change with the end of the upcoming 2019-2020 tax year… so this is a gentle reminder.
Up until this financial year, property investors were able to offset financial losses from property income against their other income (this could be from wages, salary or business), meaning reduced tax liability and often a tax return on the rental loss (based on their income tax rate).
For example, in previous financial years:
Sally earns works full time and owns a rental property. During the financial year, she earns $30,160 in rental income from the property. Sally’s expenses on the property, including mortgage interest, insurance, property management fees, repairs/maintenance and land tax/water/power costs, come in at a total of $42,656. Sally’s rental loss (difference between the rental income and expenses) is $12,496. Sally’s personal income tax rate is 33%. Sally can make a claim on the rental loss amount against her salaried income, so she will be eligible for a tax refund amount of $4,123.68.
Now, property investors won’t be able to offset their rental losses against their income. Instead, the loss will be ‘ring fenced’, meaning it is carried forward to future years, for offset against income specifically from rental properties or sale of land of residential land.
However, ringfencing is based on your overall property portfolio, meaning you can offset a rental loss from one property against the profit from another.
The idea behind the change of legislation is to make it fairer for owner/occupiers to compete with investors when purchasing property and to improve housing affordability with the view that it will increase the number of New Zealanders who can afford to purchase their own home. It will also have significant tax revenue benefits for the Government, who expect an increase of $190 million per year.
Ringfencing isn’t a simple concept by any means and there are a number of important points to consider depending on your property investment and financial situation, so we definitely recommend talking to an accountant or advisor if you have any questions (and to eliminate any surprises at the end of this financial year!)