Ring-Fencing, Bright-Line Test

Ring-fencing rental losses

IRD has released an issues paper on the proposal to change the rules of how losses from rental properties can be applied against other income. Under the proposed new rules these losses will be ring fenced meaning property investors will not be able to use these losses against their other income. The change according to the government is an effort to level the playing field between speculators, investors and home buyers.

At present if you own a rental property which is held under your name (sole trader), in a partnership or LTC and you make a loss, then you can offset that loss against your other income such as tax paid on wages. You will therefore get a tax refund.

According to the proposal the ring-fencing will be applied on portfolio basis meaning investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.

The losses will be carried forward and offset against future income from the portfolio or on taxable income from sale of residential land.

What should investors do?

- There is no need to panic as this isn’t law yet. It is proposed that the rules will apply from the start of the 2019–20 income year. The rules could either apply in full from the outset, or they could be phased in over two or three years.

- Investors who are negatively geared need to look at paying of some of their mortgages and making their investments cash flow positive

-  If you are dependent on tax refunds to make mortgage payment you may have to reconsider your investment mix. One of the solutions can be to buy cash flow positive properties to offset the losses and get a neutral portfolio.

- Consider your overall budget and see if you can do without the tax refund

- What impact with this have to your overall portfolio and take action based on this.

Again this is only a proposal; you can view the full document here.