Why Ring-Fencing will Punish Residential Property Investors

This article discusses how the proposed legislation to “ring-fence” residential rental losses could negatively affect residential property investors.

The current governments is committed to pursue it pre-election promise to “ring-fence” rental losses. It apportions blame for the housing price inflation squarely on residential property investors and speculators. Its policy ignores the true cause of house price inflation.

The real reason for inflated property market prices was due to heaps of cheap credit being available after the 2008 global economy crisis. Central governments and banks were aiming to stimulate the global economy.

Government Policy

Despite this, the government seems willing to pursue punitive policies that could stop residential property owners from offsetting rental losses against other income. In March 2018, the Treasury Department and Inland Revenue issued a combined Paper on ring-fencing rental losses. The Paper reinforced the Finance Minister’s ideas outlined in his budget speech.

Although the paper didn’t impose any immediate rules, the Minister proposed that they would become effective in April 2019. The proposed changes focus only on residential property investors.

This example outlines how the proposed ring-fencing rules could work.

ABC Limited, a Look-Through-Company, owns a residential investment property in Parnell. It purchased it for $1.1m and receives $800 rental income per week. The property was secured with a 100% interest only loan, using the rental property and shareholders’ family home as security.  The property generates $41,600 income per year and incurs $55,279 expenses, resulting in a loss of $13,679 for the year.

Rental Property Investment

Current Legislation

Under current legislation, ABC Limited’s shareholders can offset the $13,679 loss against any other income that they may have. For example, if the shareholders earn $180k between them for the year, they would pay tax on $166,321 and quite probably receive a tax refund. However, from 1 April 2019, they would need to carry forward the $13,679 loss, rather than receive a tax refund.

While this will impact many residential property investors, it’s not all negative news – especially if you hold a portfolio of residential properties. The Paper outlines proposals to apply the ring-fencing rules on a portfolio basis. In other words, losses from one property can be used to offset those from another property you also own.

For example: The shareholders also owned a property in Dunedin, which made a $9,000 profit. They will be able to offset the $13,679 loss on their Parnell property. A net loss of $4,679 would be ring-fenced and carried forward to be used to offset future profits.

Many have described that this ability to offset losses against other non-residential income is a tax-loophole. Also, this “loophole” is generally available to everyone, so there’s a strong argument that it isn’t a “tax loophole” if it’s available to everyone.

The Paper seeks to make it much more difficult to structure a person’s business affairs to avoid the legislation. Currently, a residential property investor can borrow funds to buy the shares in a company that invests in residential properties. They can then offset the interest deduction against their other income.

The proposed legislation seeks to prevent this by treating these type of interest expenses as belonging to the rental property and not the shareholders.

Conclusion

In my opinion, the proposed legislation will punish investors for preferring to invest in residential property rather than other investment types. If you’re a residential property investor, this legislation is likely to affect you. You may like to address any repairs and maintenance issues before the legislation becomes statutory on 1 April 2019.

Download the Paper from http://taxpolicy.ird.govt.nz/publications/2018-ip-ring-fencing-losses/overview. Mark Gwilliam is a Director at Business Advisory Accounting & Tax Services. Contact him on 027 449 0417 or at markg@bizadvice.co.nz to discuss how your residential rental losses may be affected.

Download It Now – 100% FREE
I agree to have my personal information transfered to AWeber ( more information )
We're going to give this eBook 100% FREE. No cost. No money. Just fill out the form you'll have instant access to your eBook now, which is packed full of practical advice to reduce your next tax bill!
*Your information is private and we will never share, rent or sell it

39 Comments

  • Clemente Reynosa

    23/07/2019 - 1:24 am

    Hi there, simply become aware of your weblog via Google, and located that it’s really informative. I’m going to watch out for brussels. I’ll be grateful should you continue this in future. Lots of other folks might be benefited from your writing. Cheers!|

  • Zenia Lundquist

    25/07/2019 - 4:30 pm

    You should take part in a contest for one of the most useful blogs on the internet. I am going to highly recommend this web site!|

  • Gonzalo Sandholm

    26/07/2019 - 2:28 pm

    Wow! At last I got a website from where I be capable of truly obtain valuable facts concerning my study and knowledge.|

  • Ismael Figgeurs

    26/07/2019 - 10:33 pm

    Thank you for the good writeup. It in fact was a amusement account it. Look advanced to far added agreeable from you! However, how can we communicate?|

  • Wilbert Barras

    27/07/2019 - 2:13 pm

    Hi, I do think this is an excellent blog. I stumbledupon it 😉 I may come back once again since I saved as a favorite it. Money and freedom is the best way to change, may you be rich and continue to help others.|

  • Efrain Kingham

    27/07/2019 - 6:25 pm

    bookmarked!!, I really like your site!|

  • Hassie Sabater

    28/07/2019 - 1:41 am

    Great beat ! I wish to apprentice while you amend your website, how can i subscribe for a blog web site? The account aided me a acceptable deal. I had been a little bit acquainted of this your broadcast offered bright clear concept|

  • Harmony Wienberg

    28/07/2019 - 6:03 am

    Thanks in support of sharing such a nice thought, paragraph is nice, thats why i have read it entirely|

  • Jerlene Hebblethwaite

    28/07/2019 - 4:11 pm

    Does your blog have a contact page? I’m having a tough time locating it but, I’d like to shoot you an email. I’ve got some suggestions for your blog you might be interested in hearing. Either way, great site and I look forward to seeing it grow over time.|

  • Andreas Brazille

    28/07/2019 - 8:23 pm

    Hi there, I enjoy reading through your post. I wanted to write a little comment to support you.|

  • Giovanni Diffey

    29/07/2019 - 3:39 pm

    I know this if off topic but I’m looking into starting my own blog and was curious what all is needed to get set up? I’m assuming having a blog like yours would cost a pretty penny? I’m not very web smart so I’m not 100 sure. Any recommendations or advice would be greatly appreciated. Cheers|

  • Glen Dimarzio

    30/07/2019 - 11:24 pm

    Thanks for the marvelous posting! I truly enjoyed reading it, you’re a great author.I will ensure that I bookmark your blog and will eventually come back very soon. I want to encourage yourself to continue your great writing, have a nice morning!|

  • Jeannine Ruggerio

    31/07/2019 - 4:58 am

    I know this website provides quality depending articles and other information, is there any other web site which provides these stuff in quality?|

  • Neal Marafioti

    31/07/2019 - 9:07 am

    If you are going for finest contents like I do, just visit this web site everyday for the reason that it presents feature contents, thanks|

  • Sherlene Haverland

    31/07/2019 - 4:55 pm

    Because the admin of this web page is working, no doubt very quickly it will be well-known, due to its feature contents.|

  • Suzy Riculfy

    31/07/2019 - 9:08 pm

    Hey there, You’ve done an incredible job. I will certainly digg it and personally suggest to my friends. I’m confident they’ll be benefited from this site.|

  • Darci Polich

    01/08/2019 - 3:23 am

    I loved as much as you will receive carried out right here. The sketch is tasteful, your authored material stylish. nonetheless, you command get bought an shakiness over that you wish be delivering the following. unwell unquestionably come more formerly again since exactly the same nearly a lot often inside case you shield this increase.|

  • Dirk Swainey

    05/08/2019 - 2:48 pm

    Pretty element of content. I just stumbled upon your website and in accession capital to assert that I get in fact enjoyed account your weblog posts. Anyway I’ll be subscribing to your feeds or even I achievement you access consistently fast.|

  • Al Costine

    05/08/2019 - 7:08 pm

    Very nice article. I absolutely love this website. Thanks!|

  • Charlsie Deshon

    07/08/2019 - 2:32 pm

    Quality articles is the crucial to invite the visitors to go to see the web site, that’s what this web site is providing.|

  • Tanner Karry

    07/08/2019 - 7:33 pm

    whoah this weblog is magnificent i like reading your posts. Stay up the great work! You understand, a lot of persons are looking round for this info, you can aid them greatly. |

  • Jamey Carnell

    08/08/2019 - 12:00 am

    I wanted to thank you for this very good read!! I definitely loved every little bit of it. I have you bookmarked to check out new things you post…|

  • Bill Dittberner

    09/08/2019 - 2:52 am

    I like what you guys are up too. This type of clever work and coverage! Keep up the fantastic works guys I’ve included you guys to our blogroll.|

  • Danial Karoly

    09/08/2019 - 8:27 pm

    Hi to every one, since I am in fact keen of reading this web site’s post to be updated on a regular basis. It contains pleasant stuff.|

  • Mercedez Nuhfer

    11/08/2019 - 4:51 pm

    I am really happy to glance at this web site posts which contains plenty of helpful data, thanks for providing these kinds of data.|

  • Burma Raynolds

    16/08/2019 - 1:01 am

    We’re a gaggle of volunteers and opening a new scheme in our community. Your website provided us with helpful info to work on. You’ve performed an impressive process and our entire group shall be thankful to you.|

  • Vance Mausser

    17/08/2019 - 7:22 am

    Hi there, all is going sound here and ofcourse every one is sharing information, that’s truly fine, keep up writing.|

  • Demarcus Mcquaid

    17/08/2019 - 7:36 pm

    As the admin of this site is working, no question very shortly it will be well-known, due to its quality contents.|

  • Kristyn Pelz

    18/08/2019 - 8:09 pm

    Hmm it seems like your blog ate my first comment (it was super long) so I guess I’ll just sum it up what I had written and say, I’m thoroughly enjoying your blog. I as well am an aspiring blog writer but I’m still new to everything. Do you have any suggestions for beginner blog writers? I’d certainly appreciate it.|

  • Margart Tschetter

    19/08/2019 - 4:36 am

    This is my first time pay a quick visit at here and i am genuinely impressed to read everthing at one place.|

  • Rodrigo Bo

    23/10/2019 - 2:29 am

    Very energetic blog, I loved that a lot. Will there be a part 2?|

  • Thomas Roskelley

    24/10/2019 - 3:29 pm

    Quality articles is the crucial to invite the people to pay a visit the website, that’s what this web site is providing.|

  • Vicente Vanderjagt

    27/10/2019 - 5:30 am

    Superb, what a weblog it is! This blog gives helpful facts to us, keep it up.|

  • Lenita Heslop

    29/10/2019 - 12:38 am

    Thanks a lot for sharing this with all folks you really recognise what you are speaking approximately! Bookmarked. Kindly also talk over with my web site =). We could have a link exchange contract among us|

  • Robena Chetelat

    29/10/2019 - 5:48 am

    It’s awesome to pay a quick visit this site and reading the views of all friends regarding this post, while I am also eager of getting familiarity.|

  • Steve Leverich

    31/10/2019 - 1:35 am

    Appreciate this post. Let me try it out.|

  • Dorothea Cassata

    01/11/2019 - 11:29 pm

    Link exchange is nothing else except it is just placing the other person’s webpage link on your page at appropriate place and other person will also do similar in favor of you.|

  • Lulu Ely

    02/11/2019 - 4:57 am

    Hi there! This post couldn’t be written any better! Reading through this post reminds me of my old room mate! He always kept talking about this. I will forward this post to him. Fairly certain he will have a good read. Thank you for sharing!|

  • Irwin Bonser

    02/11/2019 - 11:30 am

    I quite like reading a post that will make people think. Also, thanks for allowing me to comment!|

Leave A Comment