Ring-fencing of residential rental losses

Ring-fencing of residential rental losses

Labour plans to introduce legislation stopping property investors from offsetting tax losses against other income from 1 April on.

The Government is intent on shaking up the industry to address the housing crisis and believes this measure may spur investors to sell, freeing up housing stock to help families buy their first home.

But what about renters? The many who may never have the home ownership dream. The reality is that landlords who end up in a bind e.g on fixed term mortgages too expensive to break in order to sell, never mind depreciation payback and potential capital gains tax to pay, will resort to rent increases to help stay afloat.

Has this impact been fully thought through?

Unlike what is happening with the bright-line test, the Revenue Minister has stated that the ring- fencing proposal will go through the usual Generic Tax Policy Process which means there will be a consultation period and opportunity for submissions from affected parties. The deadline is 11 May 2018 which is quite close.

The Government believes the measure will not affect most people who own a single rental as a long-term investment because most are positively geared and therefore do not carry losses. But the reality is many one property rental owners are actually negatively geared with many being “mum and dad” investors stretching themselves to provide for a retirement nest egg.

The ring-fenced losses could only be applied to profits made in the future on the property against which the costs were incurred.

The policy is termed a tax “loop hole” but this change is only being applied to the business of residential property investments.

How “investor” and “residential investment property” are defined will also be interesting. Is a taxpayer with 5 rental properties an investor or are they in the business of renting? Is a holiday home rental or Airbnb property a residential investment property?

Initially the policy was to be phased in over five years. This has now been revised to two years. The impact could therefore be quite severe and happen soon.

The other sting in the tail is the bright line test extension which means if investors sell a residential property within five years, income tax is likely to be paid on any gains from it.

If you have concerns as a property investor or would like to know more contact us for advice and to develop your own strategy.