Ring Fencing of Rental Losses and 5 Year Brightline

4 April 2018


Ring Fencing of Rental Losses and 5 Year Brightline


In late March, there were two major changes to residential property investment in New Zealand.

1)  The 5 year Brightline Test has come in from 29/3/18

-  Existing rentals are not affected, but obviously you can still be taxed under other sections of the Income Tax Act (check out this Video on how property sales can be taxed).
-  If a sale and purchase agreement is signed before 29 March 2018, then only subject to the 2 year rule.

2)  Ring Fencing of Rental Losses - Why don't we make it fair?

This is only for discusson at the moment, but the paper gives a good indicaton of IRD's intention!

The IRD officials' issues paper released yesterday applies to residential rental properties, but not:

  • Business
  • Commercial Property
  • Personal home (i.e. flatmates or Airbnb, etc)
  • Holiday home
  • Farming
  • Forestry
  • Shares (i.e. can still borrow to buy shares and offset this loss against other income).

I would much prefer to see an approach where losses are only allowed for say four years for everything!  So, if you buy a residential rental, you have four years to access the losses and turn the rental into a profitable rental.  The same with a business, a farm, a holiday home, a commercial business, a forestry investment , a personal home getting rental income or investing in shares.  Everything should be treated equally.

At this stage, it is only an officials’ issues paper, but it gives a fair idea of how IRD expect to apply this. So it is looking like:

  • 1/4/19 start
  • Might be phased in over 2-3 years
  • Also apply to overseas rentals
  • Will apply to sole traders, companies, Trusts, partnerships, and LTC's.  So will apply to all entities.
  • They are trying to make it hard to work around, but there are some obvious holes that can be exploited, especially for business owners.
  • If you trade properties, a loss from rentals will be able to offset this profit.

In the long term, this rule should not create any extra tax, as the losses are still there, they just carry forward to future years.

OVERALL – Commercial property could become more attractive to invest in.  Otherwise, as we have been saying for a while, if you have a rental portfolio that is cashflow negative, it is important to have a plan to turn this positive over the next few years!

What effect do you think this will have on house prices?  And on rents?

If you are worried about your rental portfolio, a great starting point is a free 5-10 phone chat with me, to work out the best way forward.  Due to all the recent changes to tax, we are also offering existing clients a discounted meeting with your annual financial statements.  But obviously if you urgently need some advice, we can have the meeting before your financial statements are done, if that suits you better!  Just email me.

Kind regards
Ross Barnett 


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