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Ring-fencing residential rental property losses

The inability to offset residential rental losses against salary and wages (and other income) is one step closer to reality after the Government released an issues paper today. In a nutshell –

• Losses arising from rental properties will not be able to be offset against the taxpayer’s other income. These losses often arise due to interest payable on mortgages on the rental property.

• The ring-fencing will apply to residential properties only (including overseas residential rental properties)

• The person’s main home will be excluded from ring-fencing, as well as properties that are held on revenue account (i.e. subject to tax on sale because of a land dealing, development or subdivision business) and properties that are subject to the mixed-use asset rules

• The ring-fenced losses can be carried forward to future years and offset against future rental income or against future taxable income on the sale of the property

• Losses will be able to be offset on a portfolio basis i.e. ring-fenced losses from one property can be offset against income from another rental property

• The rules will apply to individuals as well as trusts, companies (including LTCs), and partnerships

• The rules are intended to kick in from the start of the 2019/20 income year.

The Issues Paper can be found on Inland Revenue’s tax policy website: http://taxpolicy.ird.govt.nz/

Submissions close on 11 May 2018.

Rental properties and holiday homes: gotta hold ‘em for five years now

If you’re about to buy a rental property or holiday home, sit up and pay attention.

Yesterday (27 March) Parliament passed legislation that extends the “bright-line” test from two to five years. This means that if you sell a residential property (family home excluded) within five years of acquisition, you will be taxed on the proceeds, regardless of your intention when you purchased it.

Aside from extending the bright-line period from two years to five, nothing else has changed. The three exceptions (main home, inherited land and relationship property transfers) still apply.

The five-year rule applies to all residential property acquired from the date of the Royal Assent. We expect the Governor-General to assent to the legislation over the coming week.

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