How this new tax law affects you?
The Government have now changed how losses generated from residential property rentals can be applied effective from 1st April 2019. This has been referred to in the media as Ring Fencing Losses. Along with the new proposed capital gains tax the major talking point now, Philip Morrison of Morrison & Associates (formerly Bullot & Rankine) looks at possible implications for residential property investors.
Many New Zealanders have leveraged a family home to purchase a rental property as an investment. This was a popular strategy, to secure a second property that, once it was paid off would provide rental income for your retirement or on sale would generate a capital gain (non-taxable).
Depending on your circumstances at the time you would borrow up to the maximum and top up any short fall between rent and your outgoings such as interest, rates, insurance etc from your day job wage or salary.
The tax benefit was you could claim this short fall as an offset against your other taxable income such as your wage or salary. This could often generate a tax refund.
Over time for different reasons the ability to claim depreciation on rental property buildings has been removed, and the introduction of a time bar on when gains on the sale of a property can be treated tax free, commonly referred to as the “Brightline Test’’, this was initially two years now five years. There has been a gradual focus on taxing buy and flick speculators in the tax net.
What are the tax rules now?
Currently losses from residential rental investment properties can be applied against all other income types. For example, you have a salary of $70,000 per annum and you have a negatively geared residential rental property which generates a $20,000 loss that you top up. As it stands now you can offset the loss from your assessable income. In this example you can reduce your taxable income from wage or salary $70,000 to paying tax on $50,000 income. This generates a tax refund.
What has changed?
The treatment of the losses has changed. There will now be a ceiling on the losses you can claim. The losses are capped at the level of rental income you receive. For example, if your rental income was $30,000 and your deduction such as interest, rates, insurance, repairs and maintenance was $45,000. You can only claim $30,000 worth of deductions. The excess deduction of $15,000 would be carried forward to future tax years until the rental property moved into profitability or applied on any gain in sale at a future date when the gain on the property was taxable.
What about the unclaimed portion rental losses?
In the event you have excess deductions(losses), these get rolled forward and applied against future rental income or against the gain on sale of the property if the gains are taxable. The tax benefit is deferred whereas currently you can claim the full amount of the loss against other income types in the year the losses are generated. In some cases, there may be restrictions as to if an excess deduction (unclaimed loss carry forward) can be used or possibly forfeited.
When will these changes be introduced?
The new tax laws will be applied effective from the new tax year commencing 1st April 2019.
What if I own more than one rental property?
When you own more than one rental property you may treat each property on a stand-alone basis or on a pooled basis which the IRD labelled a Portfolio. There are pros and cons on each method
What do I need to know? How do I get informed?
There is some complexity around how these new laws will be applied. As each individuals’ circumstances vary, we recommend making an appointment to seek what your options are and what best suits your needs. Seeking advice early on this recommended. So book in a time in April and allow you to make an informed decision in plenty of time.
How does the proposed new Capital Gain Tax affect you as an investor?
The Tax Working Group proposed tax changes are yet to be finalised and passed into law, so how these affect you as a residential property investor is still to be determined. Some commentary say the earliest this could come into law will be from 1 April 2021
The impending introduction of CGT could see some residential property investors taking the opportunity to exit. This has implications on estate planning, and Trust asset planning.
Recommend a wait and see approach. What the final form will look like will be known in 12 months and voted on at the next election before it comes into law. So we have time on this matter.
The ring fencing of residential property losses will take affect from 1st April 2019. Advise any maintenance you can do on current properties you undertake before 31 March 2019 to optimise the ability to claim the full amount of losses in the 2019 tax year. There are rules around what is deductible for tax purposes and what is deemed a capital improvement. So ask for advice before undertaking any major spends.
There are pros and cons of any tax changes and how this applies to your residential investment property. How this fits into your overall tax planning is something you will want to be informed on.
Recommend you book in an appointment to discuss how these new changes affect you and what tax strategies would work best for you. Please call the office on 09 477 30 81 (Albany office) or 09 265 2657 (Botany office) and book in tax consultation on these matters.
The views of this article are of a general nature only and are not a substitute for seeking tax advice, nor should reliance be placed on this.
Each person’s circumstances can vary and need to be evaluated on their own merits. Therefore we recommend you obtaining a tax opinion your trusted tax advisor