Residential Property Rental Losses

From the 1 April 2019 Inland Revenue is intending to ring fence losses
from residential rental properties.

Simply put any losses from residential rent will now only be offset against other residential rent, instead of other income sources such as salary, wages, investment or business income.

Where there is no other residential rental income the losses will remain
“ring fenced” to be used in the future against residential rental or property income.

These new rules will only apply to residential property, defined already by the bright line test (see our October 2015 and March 2018 newsletters). This means that a personal main home is excluded as well as properties subject to the mixed-use asset rules or land that is subject to tax because of a land dealing or developing business.

The government has also taken into account certain avoidance rules preventing investors from side-stepping the ring fencing i.e. borrowing funds to acquire shares in a company or trust which then acquires the land, for this reason the rules apply to individuals as well as trusts, companies (including LTCs) and partnerships.

As the new rules are to be implemented from 1 April 2019 if there are likely to be upcoming repair and maintenance costs that will result in residential rental losses, and the loss would normally be offset against other income, completing this work prior to 31 March may mean you get the benefit of the expense deductibility in the current income year.