Guest writer Abhi Jagwani Accountant and owner First Class accounts

From the 2019-20 income year onward, new rules apply to deductions claimed for residential properties. Residential property deductions will now be ring-fenced, meaning that they can only be used to offset income from residential property.

The legislation requires taxpayers to determine whether they hold their property on a portfolio basis or a property-by-property basis. If a taxpayer doesn’t make an election the default position is that the portfolio basis would apply.

The key difference between the two methods is that:

  • Where a taxpayer elects a property-by-property basis, the expenses of one property cannot be offset against income from other properties. However, if the sale of land becomes taxable due to the land being sold within a certain time-frame (i.e. under the bright line test) the ring-fenced losses for that property can be released and offset against other taxable income of the owner.
  • Where a taxpayer elects the portfolio basis, the expenses of one property can be offset against income from other properties, however there are restrictions on the ability to release ring-fenced losses on the taxable sale of a property.

There are some residential properties that aren't affected by the ring-fencing rules, including:

  • your main home (if you have more than one home, this is the home you have the greatest connection with)
  • property that comes under the mixed-use asset rules
  • farmland
  • property used mainly as business premises
  • property you've identified to us as land that will be taxed on sale, regardless of when it's sold
  • property owned by companies (other than close companies)
  • employee accommodation
  • property owned by Government enterprises

To find out more give Abhi a call on 0211814381, or email abhi@firstclassaccounts.co.nz