Ring-fencing Residential Rental Losses from 1 April 2019
On 5 December 2018, the Government introduced legislation that, if enacted, would restrict the use of tax losses generated from residential rental properties against other forms of income (such as wages, business income, interest and dividends).
If enacted, the legislation (The Taxation Bill (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters)) is proposed to apply from 1 April 2019, meaning that the current tax year could be the last chance for taxpayers to offset rental losses against other forms of income. These rules will apply to individuals, trusts, look through companies and closely-held companies alike.
The losses will not be forfeited and will be available to offset rental profits in future. The losses will also be available to use against any taxable gains arising from the sale of residential rental properties under the bright-line test and likely against any gains generated under any further capital gains legislation (that appears likely to be implemented in 2020/21).
This legislation will not affect investors with mixed-use assets (such as batches), as they are already covered by the mixed-use asset rules.
Legislation, as it stands, will allow the application of the ring-fencing on a portfolio basis. This means that investors would be able to offset losses from one rental property against income from another property. There are some anti-avoidance provisions to avoid some forms of debt restructuring.
With this in mind, any investors who have relied on income tax refunds generated by residential rental losses will need to re-evaluate their future cash flow to ensure they are ready for the changes.
We are happy to discuss any concerns or questions you might have around the likely changes. In the meantime, we have come up with a few tips and considerations.
Repairs & Maintenance
If you were considering undertaking large maintenance projects, such as roof replacement/repairs or painting, the best time to do this would be before 31 March 2019. This would ensure the full benefit of the deduction before the proposed ring-fencing changes are enacted.
If you are looking for a painter, Mark Palmer from Precision Decorating Ltd is a great option for a professional paint job with no surprises. He has the team to sneak through a few jobs over the next few weeks. With 31 March fast approaching, make sure you book any work soon.
If you are looking for a roofer, Mark Juchnowicz, from Trito NZ Ltd would be a great option for undertaking your roof replacement. The time frame for completing a roof replacement is also narrowing quickly, with just 6 weeks until 31 March 2019.
Insulation and heating for the living areas within investment properties is compulsory from 1 July 2019. Landlords could be liable for penalties of up to $4,000 if they fail to comply. Where existing insulation is being replaced or the costs are less than $500, you should be able to claim a tax deduction.
If you would like to discuss deductibility of any upcoming repairs, please give us a call.
Moving in to the 2020 tax year and beyond, many landlords with residential rental investments will find themselves covering loss-making residential rental properties from other income. With this in mind, we want to cover off a few ways in which you may be able to improve profitability of your investments.
Insurance premiums have been increasing across the country, particularly here in Wellington. When was the last time you undertook a review of your home insurance? Reducing insurance costs, whilst still maintaining full cover is a great way to reduce expenses on your rental property.
We work closely with Darren Butter from Kauri Financial Planning. If you would like a free, no obligation meeting to discuss your insurances, please contact him on 022-524-9531 or firstname.lastname@example.org. Darren would also ensure you have sufficient coverage, as many investors tend to under estimate the replacement costs.
Property Management Fees
Now would be a great time to look at how your property is managed. Investors that engage property managers generally receive higher rent, have better quality tenants and lower levels of vacancy. We have recently seen an example of a large portfolio of properties that were under rented by hundreds of dollars a week.
If you already have a property manager, how much are you paying your property manager and are they working in your best interests? We work closely with LPM Property Management, based in the same building as us, in Wellington. LPM Property has been managing residential and commercial properties in the region for nearly 20 years.
Their fees are 8.5% plus GST of gross rentals and are all inclusive, with the exception of advertising and maintenance costs. They don’t charge separately for inspections or maintenance management fees. If you are interested in having a no obligation chat, Shayne Thurston can be contacted on 04-805-0599 or email@example.com.
We know that there are some investors still paying 5 - 5.5% interest on mortgages. For every 1% reduction on $100,000 of funding, interest costs reduce by $1,000 each year. Some of the banks are prepared to cover some or all of break costs associated with fixed rate mortgages, upon refinancing. With recent increases in property prices and the LVR changes (70% funding now allowed on investment property), there has never been a better time to review your funding position.
With interest rates around 4%, a significant reduction in interest costs could create that positive cashflow all property investors should be seeking. We have a close relationship with Pip Paterson, from Paterson Mortgages. Pip would be more than happy to discuss available options with you. Pip can be contacted on 027-433-3882 or firstname.lastname@example.org.
Investment and Debt Restructure
Now is also a great time to review how your investments have been structured, along with your personal home and business. There are some opportunities to restructure investment properties or associated debt, to manage the impact of ring-fencing.
Given there is no one solution that fits all situations, if you would like to discuss your current situation, please contact us to book an appointment.