The Demise of the Residential Rental Loss

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

Draft legislation has been released proposing the ring-fencing of residential rental losses to be in place, in full, from the beginning of the 2020 income year.

No staged implementation, as was suggested, will take place, rather the last opportunity for residential rental property investors to offset their rental losses with other income sources will be at the end of this current tax year – 31 March 2019 for most.

The draft legislation is expected to have its first reading next week, and with public consultation having taken place earlier this year, it is highly unlikely the draft legislation will change.

The ring-fencing rules will not apply to a person’s main home, nor to mixed-use properties, such as the family bach.  The rules will however apply to overseas residential rental properties as well as New Zealand properties.

For those with a portfolio of residential properties, 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.

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 the loss offset, some investors are surely going to be reconsidering their investment decisions when they tuck into their Christmas turkey in a few weeks’ time.

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 rule, please contact your Hayes Knight advisor.