Tax Loose Ends
July 15, 2019
plant growing out of a pile of coins
Tips on Quoting for Business in Pursuit of Gross Margin
September 23, 2019
Tax Loose Ends
July 15, 2019
plant growing out of a pile of coins
Tips on Quoting for Business in Pursuit of Gross Margin
September 23, 2019

Ring-fencing of Residential Rental Losses

In April 2019 the government introduced new legislation to ring-fence losses made by residential rental properties from the 2020 tax year onwards. What this means for those that own residential rental properties is that they will no longer be able to offset any tax losses the properties make against their general personal income.

If you have multiple residential rental properties these will be treated on the default basis which is known as the “Portfolio Basis” unless you elect the alternative which is to treat them on a “Property by Property Basis”. Under the “Portfolio Basis” all your rental profits and losses will be grouped together and any losses as a result of this grouping will be ring-fenced or you will pay tax on the combined profit if the portfolio is in a profitable position.

Example:

Portfolio Rentals:

Rental Property 1 Rental Property 2 Rental Property 3
Income $15,000 $20,000 $10,000
Expenses $12,000 $16,000 $15,000
Net Profit/(Loss) $3,000 $4,000 ($5,000)

Rental income for your tax return = $3,000 + $4,000 - $5,000 = $2,000. This means that you will only be paying tax on the $2,000 overall profit.

However, if the rental properties make an overall loss:

Rental Property 1 Rental Property 2 Rental Property 3
Income $15,000 $20,000 $10,000
Expenses $13,000 $18,000 $15,000
Net Profit/(Loss) $2,000 $2,000 ($5,000)

Rental loss for your tax return = $2,000 + $2,000 - $5,000 = ($1,000). This means that you will have to carry this loss forward to the next year and it will only be able to be offset against future profits made by the rental properties. If you continue to make losses, the loss will continue to be carried forward until such time as those properties make a profit.

Under the “Property by Property Basis” all rental profits and losses are kept separate, and any rental losses can only be used against that rental property’s future profits. Based on the first example you would be paying tax as follows:

Rental Property 1 = $3,000 paying tax at marginal rate

Rental Property 2 = $4,000 paying tax at marginal rate

Rental Property 3 = ($5,000) to be carried forward

Ring-fenced residential rental losses may also be used against any taxable capital gain made on the property. If you sell your rental property and it falls under the Bright-Line test rules where any capital gains are taxable then you can use the rental losses to offset any taxable profit generated by the capital gain.

Residential rental losses that are ring-fenced can only be applied to the entity that has incurred them. For example, if you have rental properties in a trust and in a company, the profits of one entity cannot be offset with the losses of another. This is where it is critical that you seek advice and structure the ownership of your properties correctly.

Should you have any questions or queries regarding the new legislation, please feel free to contact us to discuss how this may affect your tax position going forward.

Rachel Green
Get a Quote