For years, residential property investors have been able to use losses on rental properties to offset against other income including PAYE and shareholder salaries . Residential rental properties are often “negatively” geared, which means that the expenditure exceeds the income, resulting in a loss. The 2018 Budget confirmed the Government’s commitment to restrict the ability of investors in residential property to offset tax losses from their rental properties.
Rental property losses will not be deductible against other income such as salary and wages or business income, and losses will be quarantined and carried forward and offset against future rental income. This restriction only applies to residential property and not to commercial property.
Investors say they should be given more time to adjust to changes that will limit their ability to claim tax breaks.
This is another measure aimed at trying to take the heat out of the residential property market. It follows on from the increased restriction on non-residents acquiring residential land, and the extension of the bright line test taxing residential land sold within five years increased from two years.
If interest rates increase in the future, it will have little impact on those with low loan-to-value ratios (LVRs) and those with high incomes, who will have the cash flow to manage. On the other hand, those with lower incomes and higher LVRs will be at the mercy of those in better financial positions as they struggle to cope with spikes in rates and lose the ability to get tax relief from such fluctuations because of ring-fencing."
The change will be introduced in the 2019/2020 tax year, rather than being staggered or phased in over a couple of years, so for more information on accounting firms Auckland, tax agents, business advisory services and business consulting firms please go to https://www.greenlion.co.nz .