What you need to know about New Zealand’s ring-fencing of residential rental losses bill?

Video Timeline

1. What does New Zealand’s ring-fencing of residential rental losses bill mean? -- 01:04

2. How will the proposed changes to ring-fencing impact New Zealand residential property investors? -- 03:18

3. What can I do about ring-fencing tax losses from my residential properties? - 06:12

1. What does New Zealand’s ring-fencing of residential rental losses bill mean?

Can you offset rental property losses against other income? From 1^st April 2019, the answer will be no.

The ring-fencing rental losses bill was released in December 2018, and it will stop New Zealand residential property investors offsetting losses on their rental properties against the tax they pay on other sources of income, such as their wages, salaries, or business income.

Instead, the rental property losses will be “ring-fenced” and carried forward to future years. These losses can then only be offset against taxable income from rental properties.

If the new property tax bill is enacted in its current form, the ring-fencing rule will apply from 1st April 2019 for New Zealand residential property investors.

2. How will the proposed changes to ring-fencing impact New Zealand residential property investors?

If you are a property investor in New Zealand, the ring-fencing rental losses bill could impact you significantly. Some property investors are worried that the ring-fencing will ‘pull the rug out from underneath them’.

Some New Zealand real estate experts are concerned that ring-fencing losses from rental properties would make investing in residential property less attractive. This is because property investors may choose to pass on the costs to home renters by increasing rental prices, which could have a negative impact on New Zealand’s investment property market.

Here is an example:

Let’s say a couple living in New Zealand purchased two investment properties, and the remaining mortgages were $770,000 and $700,000. They both work and receive an individual income of $90,000 and $80,000.

The rental income that they receive from their two investment properties is $30,160 and $36,140, respectively.

The expenses on their investment properties are $42,656 and $38,471, which includes mortgage interest, property insurance, property management fees, land taxes, power and water bills and repairs and maintenance. Not to mention additional costs from accounting fees and other bank charges.

Overall, this couple have made a rental property loss of $17,615.

Based on current and previous tax years, if we assume their personal income tax rates are 33%, this couple are eligible to receive a total tax refund of $5,812 against their rental losses.

But can they claim this tax refund in the future? From 1 April 2019, the answer will be no. This couple who are running two investment properties at a loss of $17,615 will not be able to claim these losses against their salaried income.

Let’s look at another scenario. If interest rates rise in the future, the proposed ring-fencing rule will have an impact on those with lower incomes and higher loan-to-value ratios (LVR), as they struggle with rising mortgage rates and lose the ability to get income tax relief. This could drive up the cost of owning a rental property, which investors may choose to pass on to their tenants.

3. What can I do about ring-fencing tax losses from my residential properties in 2019?

If you have any rental properties that need repairs or maintenance, you could consider bringing forward these deductible expenses before 1st April 2019, so that these costs are not caught by the 2019 ring-fencing rule.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.

Prosperity Finance - Here To Help

From the perspective of how your loan is structured, if you think the reduced tax benefits will have a significant impact on you, please get in touch with us by calling 09 930 8999 or emailing: support@profin.co.nz. We are experts in designing the right loan structure that suits you and we can make a personalised plan to minimise your risks.

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