NEW RULES FOR REPORTING INCOME TAX ON RENTAL PROPERTIES

From the 2019-20 income year onward, new rules apply to deductions claimed for residential properties. Residential property deductions will now be ring-fenced, meaning that they can only be used to offset income from residential property.
This means that the residential property deductions you claim for the year cannot exceed the amount of income you earn from the property for the year. Any excess deductions must be carried forward from year to year until they can be used. You cannot use excess deductions from your residential property to reduce your other income, such as salary and wages or business income, which would result in a reduced tax liability.
If you have more than one property, you can choose to apply these rules on a portfolio basis or on a property-by-property basis. 

Portfolio basis and property-by-property basisPortfolio basis
The portfolio basis is the default basis for handling residential rental income deductions. Under this basis, the ring-fencing rules are applied to all of your affected properties as a single portfolio in each tax year. This means that the allowable deductions for the properties in your portfolio can be offset against income you earn from all of the properties in the portfolio. Any excess deductions from the portfolio overall can be carried forward to future years.
Property-by-property basis
The deductions for each property dealt with on the property-by-property basis can only be offset against the income from that property. Any excess deductions must be calculated and carried forward for each property individually. If you use this basis, you'll need to keep accurate records to show that the deductions for each property were only claimed against the income from that property.
If you want to use the property-by-property basis for a property, you need to take a tax position consistent with this basis in the tax return for the later of:

• the 2019-20 income year
• the income tax year in which you first start using the property for residential rental income.

The property-by-property basis continues to apply as long as you keep filing tax returns consistent with this basis.
If you have two or more properties, you can choose to use the portfolio basis for some and the property-by-property basis for others.
We recommend that you talk to your tax agent about which approach is best for you.
Excluded propertiesThere are some residential properties that aren't affected by the ring-fencing rules, including:

• your main home (if you have more than one home, this is the home you have the greatest connection with)
• property that comes under the mixed-use asset rules
• farmland
• property used mainly as business premises
• property you've identified to us as land that will be taxed on sale, regardless of when it's sold
• property owned by companies (other than close companies)
• employee accommodation
• property owned by Government enterprises

If you're unsure if a property is affected by these rules or not, we recommend you talk to your tax agent.

Selling a propertyMost rental properties are not subject to tax when they're sold. If the sale of your property is not taxed, any excess deductions you have will continue to be carried forward. They'll be able to be used against any residential income you may have in future years.
If the sale of your residential property is taxed (e.g. if you sell your rental property within the bright-line period), you can use your accumulated excess deductions against the net income from the sale. If you still have unused excess deductions left after that, they may only be used to offset other income like salary and wages if:

• you used the property-by property-basis for the property, or
• the property was part of a portfolio, you've sold all of the portfolio properties, and all of the sales were taxed.

The amount that may be released in these situations will depend on whether you have excess deductions transferred from another property that was not taxed on sale.



Key definitions

Residential land includes a rental property with an existing dwelling, land that is to have a dwelling built on it, and bare land that could have a dwelling built on it under the relevant district plan. This includes overseas property held by a New Zealand tax resident. The way the property is held generally does not change the rules, so they apply to property owned by you, a partnership, a look-through company, a trust, or a close company. Some land used for residential purposes is excluded.

Residential income generally means the rent you earn from residential land. However, if you sell the property in a taxable sale, the net income is also considered residential income - as is any depreciation recovery income from the sale.

Excess deductions, also known as rental losses, are when your allowable deductions for a residential property or portfolio exceed the amount of income you earned from the property or portfolio in the same tax year. Learn more about which rental property expenses can and cannot be deducted.