Ring Fence Rental Property Losses
Labour’s proposal that they would ring-fence losses from residential rental properties from other income to end the practice of negative gearing, will mean you can’t get tax refunds from negative cash flow investments.
This was part of their housing policy released in 2017 and their intention is to phase in the removal of negative gearing by reducing the tax deductibility of rental property losses by 20 per cent per year over a period of five years.
When a rental property is first purchased, the rental income is often insufficient to cover all expenses. It can take a number of years before the property becomes cashflow positive from a tax point of view. This situation is not unique to rental property, as many businesses are not profitable in their first few years of operation.
Labour’s proposal would see rental property treated differently from other businesses.
The proposal would:
- More than likely affect new investors, as more established investors are likely to have other cashflow positive property that they can use to offset the loss of any new rental purchase.
- Make it extremely hard to provide new rental property for many investors.
Provide for existing property owners a greater incentive to increase rental prices to offset increase, in particular if NZ enters a period of interest rate increases.
- Unlikely impose a large cost on property owners who are not selling on a frequent basis.
This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your normal source of expert advice before acting on anything or contact ABA Chartered Accountants if we can assist you in any way.