Not only have residential investors been hit with the extended 5-year bright-line test, the new loss ring-fencing rules will mean many residential rental property owners may struggle to cashflow the costs of owning their rental property.

Legislation was passed in mid-2019 which ring-fences residential rental losses from the beginning of the 2020 income year.

A staged implementation had been suggested but did not make the final cut. Instead, the last opportunity for residential rental property investors to offset their rental losses with other income was the end of the 31 March 2019 tax year.

The loss ring-fencing rules do not apply to mixed-use properties, such as the family bach, they do however apply to overseas residential rental properties as well as New Zealand residential rental properties.

For those with a residential portfolio, rental losses of one property can be offset against rental profits from other portfolio properties, or against taxable gains from the sale of properties.

Given the onslaught of new rules and regulations being imposed on residential landlords, from the new Healthy Home standards, to limiting rental increases, the increased 90-day notice period and allowing tenants to make changes to the property, and now the removal of loss offsets, the attraction of being a landlord could be diminishing somewhat.

Whether it be exiting the market or increasing rents, the changes do not bode well for solving the current shortage of residential rental properties.

If you would like to discuss the impact of the new loss ring-fencing rule, please contact your usual Hayes Knight advisor or the Hayes Knight Tax Team.


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