Sharechat Logo

Real estate investors to lose tax loophole from April next year

Thursday 29th March 2018

Text too small?

Investors and speculators will lose their ability to offset losses on residential properties to reduce their tax on other income from April 1 next year, if proposals in an Inland Revenue Department issues paper published today are adopted.

Revenue Minister Stuart Nash issued the paper on 'ring-fencing rental losses', saying "persistent tax losses that many property investors declare on their investments indicate that they rely on capital gains to make a profit".

The IRD paper says there is "therefore an argument that, to the extent deductible expenses in the long term exceed income from rents, those expenses in fact relate to the capital gain, so should not be deductible unless the capital gain is taxed". 

Moving to ring-fence losses from property investments would further remove current bias in the tax system that creates advantages to owning residential real estate over other kinds of investments and would follow this week's passage of new law extending the so-called 'bright line test' for whether proceeds from a property sale should be subject to capital gains tax from two to five years.

However, the proposals do mean that accumulated annual losses on rental properties could be used to offset capital gains tax levied in the future and could be used to offset tax on income earned on other rental properties. The prohibition would be on using rental property losses to offset personal and company tax liabilities.

Nash said the proposals did not cut across the separate work of the Tax Working Group, which is due to recommend on tax system recalibrations, including taxation of capital gains on assets other than the family home, next year.

To simplify compliance, IRD proposes that residential investment properties be dealt with on a 'portfolio' basis, meaning a single investor could lump together the losses from a portfolio of properties rather than having to declare a separate tax position against each one.

Rules to prevent interposing a company, trust or other entity between the investor and their properties to circumvent the ring-fencing rules are proposed, but the IRD suggests it would be too complex to try to enforce debt allocation rules on a property-by-property basis across a portfolio - the other main avenue by which taxpayers could reduce their tax liability under the proposed new rules.

Assuming they proceed, the changes are slated to apply from April 1, 2019, although tax officials are seeking submissions on whether they should apply fully from day one or be phased in over two years "to allow affected investors more time to adjust to the new rules, or to rearrange their affairs before the rules apply in full". 

The IRD paper proposes that the interest deductibility rules would not apply to the main family home, using the same criteria as the bright line test, and would not apply to farmland, business properties or mixed-used assets that were partly residential and partly used to run a business. People renting out rooms in their main home would not be caught by the proposals.


  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

MYOB adds 57% more subscribers in 2018 but total online customers still lag Xero's
Investors fear chilling effect as former IRD boss opposes capital gains proposals
Stuff 1H earnings slide but Nine still optimistic of finding buyer
NZ Post achieves first-half revenue growth for the first time since 2015
TeamTalk affirms annual earnings guidance as rising costs dent first-half profit
Government to step up efforts as second Queensland fruit fly detected
Spark's Moutter bangs drum for 5G spectrum auction
F&P Healthcare and ResMed drop patent infringement disputes
NZ dollar dips after Fed minutes not as dovish as expected
February 21st Morning Report

IRG See IRG research reports