With a significant number of rental properties in the Queenstown Lakes District, the changes to tax legislation around rental income and the implementation of ring-fencing is likely to hit close to home. At the end of this financial year, this change will have come into full effect, meaning rental property owners could be noticing some changes on their end of year tax return.
Levelling the field
It is challenging for new home-owners to compete against investors when buying a home due to cashflow. The change to legislation intends to make this a more even opportunity and hoping that in turn this will increase the number of home-owners within New Zealand through housing affordability. Inland Revenue will also benefit from the changes by a forecast $190 million per year.
In past years
A rental property makes a yearly profit or loss from the income (rental payments) received from tenants, generally a loss. A property will also have many outgoing expenses, for example:
- Mortgage interest (generally the most significant cost)
- Property management fees
- Land tax (rates)
- Services costs e.g. water and power.
The rental loss amount is the difference between the incoming rental payments and outgoing property expenses.
In previous years, if a property investor has made a rental loss against a particular property, the loss amount has been offset against the investor’s other income sources where possible. This other income could come from;
- A business.
‘Offset’ means the investor was able to make a claim on the rental loss amount against their salaried income based on their personal income tax rate, e.g. if the rental loss amount was $12,496 and the investors tax rate was 33%, a tax refund amount of $4,123.68 was given.
This system meant a significantly reduced tax liability for investors and in many cases, a tax return.
Now, instead of permitting investors to offset rental losses against other income sources, rental losses will be ‘ring-fenced’. Ring-fencing means rental losses are carried forward to the next year, but not cleared until they can be offset against income specifically from rental properties or from the sale of residential land (not from any other income sources).
If you have multiple rental properties, it is worth noting that your entire property portfolio is considered when submitting your return. This means you could potentially offset a rental loss from one property against another rental income, or the sale of residential land.
If you have particular queries around your rental property, we are more than happy to discuss. Please feel free to contact us.