As of April 2019, losses from residential property investments have been ring-fenced. Investors are no longer able to use losses from residential property to offset taxable income from other sources such as wages or business income.
As with any tax law change, the details can be a little confusing, making it hard to understand how this will affect your tax position. To make your life (and tax return) easier, we’ve explained the new rules and answered key questions.
WHAT PROPERTY WILL THE RULES APPLY TO
Only residential property will be affected by this change so feel free to breathe a sigh of relief if you’re a commercial investor.
The rules also do not apply to the following residential properties:
- Those subject to the mixed-use asset laws. For example, a bach that’s rented out occasionally and used privately.
- Land that is on revenue account because it is held in a land-related business.
Your main home is also (usually) exempt so there should be no need to worry if you earn income from renting out a room occasionally.
CAN I STILL CLAIM LOSSES FROM RESIDENTIAL INVESTMENT PROPERTY?
In many cases, if your investment property makes a loss, you will be able to use it to offset your taxable income. In fact, losses can usually be:
- Carried forward to offset income from future years.
- Used to reduce taxable income on the sale of residential property.
Making the most of these rules will require careful accounting of your losses so that you don’t pay more tax than you need to in the future.
HOW DO I CLAIM MY LOSSES?
Property losses will usually be applied on a portfolio basis. This means if you have more than one property within the same portfolio and some profit, while others make a loss, it’s possible to use the losses to offset taxable income from the profitable properties.
To claim losses from one property against another’s profit, they must be held by the same entity. For example, if one of your investments is in a trust and the other is held privately, all losses are ring-fenced.
It’s also important to remember that all losses are released (no longer claimable) once you sell the property.
WHAT SHOULD I DO ABOUT IT?
If you’re proactive, these new ring-fencing rules shouldn’t hit your back pocket.
To minimise their effects it’s a good idea to:
- Hire a specialist property accountant to advise you on the most appropriate tax structure for your property investments.
- Simplify your property portfolio into one entity so that losses are claimable from property to property.
- Focus on high cash flow property investment – making a loss across your whole portfolio is no longer attractive in most cases.
- Check regularly to ensure you have the best possible mortgage interest rate so that your properties are less likely to make a loss.
- Ensure you’re charging market rent. If you’re not, it could be a good idea to speak to your property manager about how you can raise the rent in a way that’s fair and legal.
These new laws can be extremely complex, depending on your situation. To make sure you’re not paying a dollar more tax than you have to, give us a call at Property Tax Returns today.