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
- 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