Changes to taxation on real estate
As part of its continued focus on the taxation of residential real estate, the current Government has proposed that tax losses from residential rental properties should be “ring-fenced”.
A loss arises for tax purposes in relation to a rental property where the annual costs to own and maintain the property — such as interest, rates, insurance, repairs and maintenance — exceed the annual rental income. If the resulting tax loss is “ring-fenced,” it cannot be offset against income derived from other sources and must instead be carried forward to future income years. The loss can only be used to offset future income from residential rental properties, either as rental income received or as a taxable gain on sale.
The law change is aimed at levelling the playing field between property speculators and investors. The Minister of Revenue, Stuart Nash, has stated that the law change “is expected to boost revenue by at least $325 million over four years and further dampen property speculation, while encouraging investment in the productive economy”.
The Property Institute has said that the proposed change will drive people out of property investment and make the current rental crisis even worse. Public submissions on the proposal are currently being considered.
Other aspects to note are:
• To determine whether there is a tax loss, the rules apply on an overall portfolio basis rather than on a property-by-property basis.
• The rules are not restricted to New Zealand property and would apply to residential rental investments offshore. The rules would be consistent with the bright line test in this respect.
• Anti-avoidance measures will apply to ensure taxpayers cannot structure around the rules by, for example, having their debt funding and rental properties in different legal entities.
• The rules will not apply to a person’s main home, a property subject to the mixed-use assets rules, such as a holiday home that is used privately and also rented out, or property held as part of a land-dealing business, such as a building or property development business.
The new measures to ring-fence losses are expected to apply from 1 April 2019, but may have a phasing period of two to three years.
If you would like to know how these proposed law changes may affect your existing residential rental properties, or you are thinking about investing in a residential rental property, please contact one of the team at Crowe Horwath.
■ This information is general in nature and readers should seek specialist advise before making financial decisions.