What is the new policy to Ring fencing Rental Losses?
Previously, negatively geared investors (investors where the rental income was less than the deductions including interest, rates, body corporate levies) enjoyed a tax benefit that allowed them to offset the rental loss against their other income.
Inland Revenue estimates that approximately 40 percent of taxpayers with rentals record rental losses at any given time, with an average estimated annual tax benefit of $2,000
Look Through Companies where the losses flowed through to the owners became a popular investment vehicle.
However, a tax reform now means that residential property investors will only be able to offset deductions against income from their property portfolio.
This means if you have more rental losses than rental profits from other properties, then you have to carry forward the loss until you make a profit in a future year.
From an investment point of view, the ring fencing of losses will negatively impact your cash flow in the early years of your investment especially if you are negatively geared and still making rental losses. In the long run, it won’t make a difference assuming you eventually make a rental profit because the accumulation of previous losses can be used to offset the profits in the future.
The govt worries that Landlords will pass on their rental losses to tenants in the form of increased rents.