Reporting Income Tax on Rental Properties

From the 2019-20 income year new ring-fencing rules apply to residential property deductions. Ring-fencing means residential property deductions can only be used to offset income from residential property. You cannot use rental losses to offset other income like salary and wages.

Under the rules, you can only claim deductions up to the amount of income you earn from the property for the year.

You must carry forward deductions over that amount. You can use these deductions to offset your rental income in future income years.

Types of property subject to the new rules

The new ring-fencing rules apply to residential land - mainly residential rental properties. This includes overseas property held by a New Zealand tax resident.

The rules generally apply no matter how the property is held. The rules apply to property owned by you or:

• a partnership

• a look-through company

• a trust, or

• a close company.

If you have a tailored tax code and rental income, the new ring-fencing rules may affect you. 

The rules do not apply to:

• your main home. If you have more than one house, the main home is the one you have the greatest connection with

• property that comes under the mixed-use asset rules. For example, a family bach you sometimes rent out, sometimes use yourself, and is vacant for 62 days or more a year.

• farmland

• property used mainly as business premises

• property that will be taxed when it's sold, regardless of when you sell it. This includes property held in land related business and property bought to sell.

• property owned by companies (other than close companies)

• employee accommodation (in most cases)

• property owned by Government enterprises.

Options for owners of more than 1 rental property

If you own more than 1 residential rental property, you can choose whether to apply the rules across your portfolio of properties, or to apply them on a property-by-property basis - keeping separate accounts for each property.

The portfolio basis (the default)

If you apply the rules across your portfolio of properties, the deductions for all the properties offset the income from all the properties.

If the rental portfolio is loss-making overall, you must carry forward the excess deductions.

Property-by-property basis

Here, you look at each separate property. You can only use the deductions for a particular property to offset the income from that property.

Talk to us about which approach is best for you.