Residential Ring-fencing Rule

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. 

Excluded properties

There are some residential properties that aren't affected by the ring-fencing rules, including:

• your main home (if you have more than one home, this is the home you have the greatest connection with)

• property that comes under the mixed-use asset rules

• farmland

• property used mainly as business premises

• property you've identified to us as land that will be taxed on sale, regardless of when it's sold

• property owned by companies (other than close companies)

• employee accommodation

• property owned by Government enterprises

Selling a property

Most rental properties are not subject to tax when they're sold. If the sale of your property is not taxed, any excess deductions you have will continue to be carried forward. They'll be able to be used against any residential income you may have in future years.

If the sale of your residential property is taxed (e.g. if you sell your rental property within the bright-line period), you can use your accumulated excess deductions against the net income from the sale. If you still have unused excess deductions left after that, they may only be used to offset other income like salary and wages if:

• you used the property-by property-basis for the property, or

• the property was part of a portfolio, you've sold all of the portfolio properties, and all of the sales were taxed.

The amount that may be released in these situations will depend on whether you have excess deductions transferred from another property that was not taxed on sale.

Please feel free to contact me to discuss your situation.