By Serena Irving

Residential property investors were targeted in the latest tax Bill before Parliament in December 2018. The Bill is likely to have the numbers to pass into Law, so if you have rental property or are considering investing, keep reading.

Figure 1 : Photo by Alex D'Alessio on Unsplash

The proposal to "ring-fence tax losses" means that investors who previously offset rental losses against other earnings will no longer be able to do so. Rental losses of one property can be offset against other rental profits in the person's portfolio, or against gains from the sale of properties, or carried forward to offset future rental profits/gains.

The change will take effect from the start of the 2020 income year (1 April 2019 for most taxpayers). If you are considering any major repairs, we suggest that you complete them before 31 March 2019. The rule changes do not affect a person's main home or mixed-used properties such as beach houses, but do apply to overseas residential rental properties.

Under the bright-line property rules from 29 March 2018, people who sell a house in New Zealand within five years of buying it must pay income tax on any gains, unless it's their main home or another exception applies.

In addition, there are increased requirements on landlords for giving notice, limiting rent increases and improving living standards. It may be tempting for some landlords to consider selling their investment properties, even though there is a rental property shortage.

Without the tax refund, would you have enough funds available to cover vacancies or major maintenance work? Auckland Property Investors Association board member Amanda Watts said in her June 2018 blog, Removal of Negative Gearing, "My concern is that for some landlords this may mean the difference between doing or not doing maintenance if there is no immediate tax relief. They might have to postpone the repairs until another year, increasing the risk that the property will deteriorate and that vacancies might result." Source: www.apia.org.nz/apia-blog

There are a lot of factors to consider other than the tax. What are your long-term investment objectives? Could you get a better return in other investments? Could you pay down the mortgage to reduce interest costs? Could you increase rents to improve your income?

If you would like to chat about how the ring-fencing of tax losses will affect you, please give us a call.

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Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.