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Ring-fencing. How will it affect property investors?

18 January 2019

Photo: Wellington by itravelNZ

Soon NZ landlords won't be able to offset their residential rental losses against other income, as the Government introduces new tax bill.

What is it?

In December 2018 a new bill was introduced by the government to include ring-fencing of tax losses in relation to residential rental properties from the start of the next financial year.

If the bill is passed, from 1 April 2019 NZ property investors will only be able to offset deductions against income from their property portfolio and won't be able to use their property losses to offset their other sources of income like wages, salaries and business income.

Why is it being introduced?

The government is hoping that the proposed law will improve first-home buyers chances of buying their first homes, improves housing affordability and the increases proportion of New Zealanders who own their own homes.

What if I'm likely to make a profit next year?

If you’re making a big profit, ring-fencing is not going to affect you.

What if I'm likely to make a loss?

If the expenditure exceeds income from the rental property, the losses must be carried forward to future income years to be applied against the property portfolio profits only. You are then likely to pay more tax on your other income sources (e.g. personal & business income) due to ring-fencing.

How can I come out on top?

If you have a negatively geared property, think of any significant repairs coming up, maintenance issues to address. To take advantage of the current tax laws, ideally, you would want to bring these repairs forward and complete them by 31st March 2019. This way you would still be able to claim the expenditure as a deduction in the current income year and receive a tax refund.

How can I turn my negatively geared property into a positively geared?

There are two main ways that you can convert your negatively geared property into a positively geared one - increase your rental income or reduce your expenses.

1 - Improve your rental income

Consider raising your rent. If you haven't reviewed your rent in a while, there is no better time than now to determine whether your rent is at market rate.

Consider installing a dishwasher, air conditioning unit, retiling a bathroom or converting a garage into another bedroom. Anything that improves tenants current living conditions can lead to a rent increase.

2 - Reduce your expenditure

Have a look at your expenses. Are there any fees that can be reduced? If you signed up for a mortgage loan a few years ago, you might be eligible for a lower interest rate. With letting fee ban coming into effect last year, many property management companies are putting their rates up. Shop around for a better rate or consider managing some of your properties yourselves. Even a small drop in expenses might be all you need to start generating positive cash flow.

Feeling enthusiastic enough to make a submission?

There is still time to do that. Here is the link to the actual Bill.

It is important to remember that at this stage the legislation is just a draft. Although if the bill is passed in its current form, it leaves little time to adjust to proposed changes. So you might as well start taking action now.

The information contained in this article is exclusively for promotional purposes. It does not in any way constitute legal advice and should not be relied upon as the basis for any legal action or contractual dealings. The information is not and does not attempt to be, a comprehensive account of the relevant law in New Zealand. If you require legal advice you should seek independent legal counsel. does not accept any liability that may arise from the use of this information.

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