New rules for reporting income tax on residential rental properties

The rules for residential rental property deductions have changed - find out how they might affect you and your properties

From the 2019-20 income year onward, new rules apply to deductions claimed for residential properties. Residential property deductions will now be ring-fenced, meaning that they can only be used to offset income from residential property.

This means that the residential property deductions you claim for the year cannot exceed the amount of income you earn from the property for the year. Any excess deductions must be carried forward from year to year until they can be used. You cannot use excess deductions from your residential property to reduce your other income, such as salary and wages or business income, which would result in a reduced tax liability.

If you have more than one property, you can choose to apply these rules on a portfolio basis or on a property-by-property basis. You can find more information on these rules here on IRD’s web site, or in the Tax Information Bulletin, Vol 31, No 6 - July 2019.

Portfolio basis

The portfolio basis is the default basis for handling residential rental income deductions. Under this basis, the ring-fencing rules are applied to all of your affected properties as a single portfolio in each tax year. This means that the allowable deductions for the properties in your portfolio can be offset against income you earn from all of the properties in the portfolio. Any excess deductions from the portfolio overall can be carried forward to future years.

Property-by-property basis

The deductions for each property dealt with on the property-by-property basis can only be offset against the income from that property. Any excess deductions must be calculated and carried forward for each property individually. If you use this basis, you'll need to keep accurate records to show that the deductions for each property were only claimed against the income from that property.

If you want to use the property-by-property basis for a property, you need to take a tax position consistent with this basis in the tax return for the later of:

• the 2019-20 income year

• the income tax year in which you first start using the property for residential rental income.

The property-by-property basis continues to apply as long as you keep filing tax returns consistent with this basis.

If you have two or more properties, you can choose to use the portfolio basis for some and the property-by-property basis for others.

We recommend that you talk to your tax expert about which approach is best for you.