Residential rental loss changes

Kirsten Hawke

Investing in residential property has been a popular option ever since Bob Jones on Property, hit the booksellers’ shelves back in 1977.
However, some 40 years later New Zealand is in the middle of an affordable housing crisis and the policy makers are introducing changes that impact on residential rental investment rules.

Residential rental loss changes

How much impact the changes will have on the housing situation is unclear but property investors need to take note.

From March 2018, the bright-line test, was extended from two to five years.

That means if you bought a property after March 29, 2018 and sell it within five years, the sale needs to be assessed to determine if it is taxable under the bright-line test.

Now, new rules that ring-fence rental losses will impact on cash flow and many residential rental property owners may struggle to manage costs of owning the property.

In March 2018, an officials’ issues paper outlining the rule changes was published, which included consideration of a staged implementation but this has not been introduced.

Now, the draft legislation proposes the ring-fencing of residential rental losses will in place, in full, from the beginning of the 2020 income year.

It appears there will not be a staged implementation and the last opportunity for residential rental property investors to offset their rental losses with other income sources will be at the end of this current tax year – March 31, 2019 for most.

Public consultation took place earlier in 2018 and it is highly unlikely the draft legislation will change.

Like the bright-line test the ring-fencing rules will not apply to a person’s main home, nor to mixed-use properties, such as the family bach. 

However, the rules will apply to overseas residential rental properties as well as New Zealand properties.

For those with a portfolio of residential properties, rental losses of one property can be offset against other rental profits in the person’s portfolio, or against gains from the sale of properties.

Residential landlords have experienced numerous changes, including the new Healthy Home standards, limiting rental increases, increased 90-day notice period and allowing tenants to make changes to the property.

The removal of the loss offset will mean some investors may need to reconsider their investment decisions when they tuck into their Christmas turkey next week.

If you would like to discuss tax issues for rental property, please contact your BUSINESS buddy.

Kirsten Hawke