If you have excess deductions, you will need to carry them forward from year to year and deduct them if your home generates income. The government has committed to several policies that it believes will make the tax system fairer and improve housing affordability for homeowners by reducing demand from speculators and investors. The government expects that the introduction of closing rules for loss-strapping will help improve the playing field for real estate speculators/investors and home buyers. The government believes that investors (especially highly targeted investors) have a share of the cost of servicing their mortgages, which are subsidized by reducing taxes on their other sources of income, which helps them outbid homeowners for real estate. The government intends that the proposed fence for residential property losses will reduce this benefit and perceived unfairness. Taxpayers have the option of applying the delimitation on a land basis. Choosing on a property basis means that deductions relating to a property can only be deducted from the income from that property. If deductions for property exceed income from that property, excess deductions cannot be deducted from income from another residential property and must be deferred. There will be circumstances in which choosing a real estate base is preferable to applying a portfolio base.

The proposed start date for the ring-fencing rule is the start date of the 2019-2020 income year (April 1, 2019 for most taxpayers). Given that we are currently in the first income tax year that will be affected by these rules, there are some issues you should think about now before they catch you off guard at the end of the year. The default position will be that the rule applies on a portfolio basis, meaning taxpayers will be able to offset deductions for one residential property with income from other properties – essentially by calculating their total gain or loss in their portfolio. However, taxpayers may choose to apply the rule on the basis of immovable property if they wish to apply this alternative method. All affected residential real estate investors could consider advancing deductible expenses (such as repairs and maintenance) into the current income year so that these expenses are not covered by the new purpose. When real estate is owned by other businesses, the rules become more complex. For example, if a rental property is owned by a long-term care company, the landlord is treated as if they were making a choice, not as LTC. A person`s principal residence is, of course, excluded because it is outside the tax network, as well as properties subject to mixed asset rules (such as the vacation home if rented) and properties that are taxable when sold (i.e. held in an income account, similar to the land used by developers). There is a special rule to prevent an intermediary entity (e.g.

a corporation or trust) from being used to circumvent the ring-fencing rule. This special rule would apply if someone has taken out loans to acquire a stake in a business and more than 50% of the company`s assets are residential real estate in a given income year. If more than one rental unit is owned, the rules allow for the treatment of loss recognition on a portfolio or ownership basis. The standard method is the basis of the portfolio, and a taxpayer must choose to treat each property individually if they wish. It is proposed that the rules on closing losses should apply on a per-portfolio basis. This would mean that investors would be able to offset the losses of one rental property with rental income from other properties and calculate their total profit or loss for all rental properties. An investor will be able to offset affected rental losses of residential real estate from one year with residential rental income from future years (from any property) and taxable income from the sale of residential land. For owners of existing rental apartments, the election must be made on their tax return for the 2019/20 tax year (i.e. the first tax return affected by the new rules). While these changes were proposed at a time when the real estate market was booming to improve homeownership statistics, the update to these rules came at a time when the housing market is slowing.

These changes also come into effect after a period when residential real estate investors had to deal with numerous changes aimed at slowing down the real estate market, such as the introduction and expansion of insulation requirements for clear line tests, healthy homes, changes to the tenancy law and court decisions, restrictions on foreign buyers, LVR rules and tighter lending in New Zealand. The « ring-fenced » loss rules on residential real estate apply from 1 April 2019. The purpose of these rules is to prevent owners of residential properties from offsetting the losses of these properties with other sources of income, such as wages and salaries or business and capital gains, thereby reducing the person`s tax liability. The tax authority acknowledges that avoidance rules will be necessary to prevent structuring around the proposed closing. For example, the tax office specifically mentions the need to prevent investors from circumventing regulations by raising funds to acquire shares in a company or to fund a trust or other entity that invests as residential real estate. These rules were previously proposed when the real estate market was booming and were seen as another way to slow down the housing market by limiting (or affecting) the deductibility of investors` rental costs to the amount of rental income derived from it. The Treasury and IRS expect the ring-fencing rule to cost residential real estate investors about $190 million a year. The rules relating to the delineation of residential real property do not apply to mixed-use residential land.

Instead, the mixed-use asset rules limit deductions related to the property and include provisions that allow excess expenses, whose deductibility has already been limited, to be « quarantined » until a future year if there is excess rental income to offset the quarantined portion of reduced expenses. As we mentioned in our previous article on this topic (which covers the topic in more detail), the new rules have an expected application date of the beginning of the 2019-20 income year. For individuals with a standard balance date of March 31, the rules apply retroactively to April 1, 2019. Residential property deduction rules do not apply: The proposed new rule applies to « residential land » (in New Zealand or overseas) and uses the same definition of « residential land » that already exists for the line of light test. However, the rule does not apply: Special rules are also introduced to ensure that purpose limitation rules cannot be avoided by using a trust, corporation, intermediary corporation or partnership. When funds are borrowed to invest in a « land-rich residential real estate » unit, an entity where more than 50% of the assets are residential real estate by value, the interest on the loans is considered « rental mortgage interest » and is subject to allocation rules. Our previous article « Ring-fencing Of Residential Rental Property Loss » explained what these rules are and under what circumstances they apply. Now let`s take a look at these residential fence rules and mixed-use assets. You can claim deductions up to the amount of rental income you earn in a year (including income from the sale of a property). This is called « ring-fencing ». Since rent deductions can only be claimed on rental income, you can no longer deduct excess deductions from other income such as wages or salaries. The government is proposing that the loss-fence rules apply to « residential properties. » The definition of « country of residence » that already exists for the brightness test applies.

The rules would not apply to a person`s principal residence, property subject to the mixed-use asset rules (such as a vacation home that is also used to generate rental income), or land that is taxable for sale because the person holds it in the course of a trade or development business. Choosing a basis for calculating deductions for rental properties Please contact us for more information on the delineation rules for residential and mixed-use properties. Excess deductions (losses) are carried forward to reduce homeownership income in future years or to reduce the taxable amount of income (if any) from the sale of the residential property. The remaining unused deductions will generally continue to be affected. However, in some situations where a residential property is taxed for sale, any remaining unused deductions may be released so that they can be deducted from other income. Prior to the introduction of ring-fencing rules, investors could deduct excess deductions from their property from other sources of income (e.g., salary, business income), thereby reducing their income tax.